Liquidity: forth herein. forth r Agent is Remarketing northe Advisors, the Co-Financial the City, of None Services. the CUSIP for asubstitute as in any way This Association. Bankers TheAmerican of behalf on LLC Services Poor's Financial & Standard by managed Services, Global CUSIP the Ameri of trademark registered isa CUSIP theBonds. of owners of convenience the solely for is included number * TheCUSIP Texas. SanAntonio, & L.L.P,of Horton Parkhurst McCall, byitscounsel Agent for theRemarketing withther be deliveredinconnection to & BondCounsel, L.L.P., Jaworski ofFulbright oflegal opinion form Appendix Eforthe beavail expectedto are Bonds remarketed The Counsel. Co-Bond Texas, SanAntonio, of Inc., both & Poneck, Escamilla L.L.P. and Generalof th opinion oftheAttorney withtheapproving together purchasers, deliveredtotheinitial wereoriginally The Bonds Purpose: Redemption: Repurchase; Interest: (CUSIP: 796253Y55)* herein MATTERS" "TAX See Bonds. the of remarketing the with connection in be delivered to opinion legal the the leg concerning information for Bond Counsel" of Opinion Remarketing Form of and Counsel Co-Bond of Opinion Initial of "Form mat the to subject law, existing the under tax purposes income federal for income gross from Bonds the on interest of exclusion BONDS – INTEREST" "THE under described Rate, as Term to a two-year Bonds the of the conversion Counsel, Bond of opinion In the REVENUEBONDS,SERIES2004 NOT ANEWISSUE Conversion: Denominations: Security: Dated: Date of Delivery Mandatory Tender Date: December 3, 2012 Due: Mandatory 2012December Tender 3, Date: ofDated: Date Delivery AGREEMENT". herein. See"STANDBYBONDPURCHASE orreplacedasdescribed terminated unless thefacilitysoonerexpiresoris San Francisco Branch, under aStandby BondPurchase Agreement, or bytheobligorunderanysubstituteLiquidityFacility, Any Bonds tendered forpurchase and notremarketed willbe purchased by BNP Paribas ("BNP Paribas"), actingthrough its described herein, the "Systems")and paying thecosts of issuance ofthe Bonds. See STATEMENT"."INTRODUCTORY (as definedandfurther and gassystems the City'selectric SouthTexasProject, making otherimprovementsto capacity inthe provide fundsforthepurposesissued to The Bonds ofacquiring wereinitially 300additional megawattsofelectricgenerating OF BONDS – PURCHASE BONDS" be tenderedforpurchase andpurchased upon certaineventsdescribed hereinattheoption oftheLiquidity Bank. See "THE m herein,and (iii) mandatory redemptionasdescribed tooptionalor subject (ii)willbe amount plusaccruedinterest,ifany, a priceequalto100%oftheprincipal rateperiodat specified aboveandontheBusiness Dayaftereachsuccessiveinterest While theBonds areina Term Mode, they (i)mustbetenderedfor purchaseand purchased on the mandatorytender date on the Bonds will be payable on each June 1 and December 1, beginning June 1, 2011. See "THE BONDS – INTEREST". (unless changed asdescribedinterest rateperiods herein) atTerm Rates determinedby the Remarketing Agent, and(ii)interest December 1, 2010 foran interestrateperiodextending through November 30, 2012 andthereafterfor successivetwo-year perannum remarketed inatwo-yearTermMode.from WhileintheTermMode(i)Bondswillbearinterestat1.15% The City ofSan Antonio, Texas ("City")Electricand Gas SystemsJunior Lien Revenue Bonds, Series 2004 ("Bonds") will be may change. See "THE BONDS – INTEREST - Conversion of Interest Modes". provisions forredemptionandmandatory tenderof theBonds, as wellastherightsofownersto have their Bonds purchased, Bonds aresubject periods,interestpayment dates, tooptionalredemption.Thereafterand theinterestrates,rate rateperiodsintheTermMode maybechanged,rate modes,orthedurationofinterest attheoptionofCitywhenever the mode fortheBondsmaybeconverted,inwhole The interestrate or part,fromtheTermModetoonemoredifferentinterest BONDS –GENERAL". While theBonds areintheTermMode,they are issuable in denominationsof$5,000andmultiples$5,000. See "THE ofandSecurityforPayment". -Sources PROVISIONS See "THE –BOND BONDS Agent or, The ifinsufficient,paymentsmadeunderthe Cityisnotobligatedtopurchasetendered Liquidity Facility. Bonds. price ofBondstendered forpurchase ispayablesolelyfromproceedsoftheremarketingsuchBonds bytheRemarketing outstanding SeniorLien Obligations andany Additional SeniorLien Obligationshereafter issuedbytheCity. The purchase ratably securedby ajuniorlienon and pledgeofthe NetRevenues of theSystemsremainingafterpaymentcertaincurrently and City,areequally Obligations hereafterissuedbythe andanyAdditionalJuniorLien LienObligations outstanding Junior The Bondsarespecial obligationsoftheCity. Principal andinterestarepayablesolely fromand,togetherwiththecurrently – Book-Entry-Only Book-Entry-Only ______ELECTRIC AND GAS SYSTEMSJUNIORLIEN AND ELECTRIC OF SANANTONIO,TEXAS CITY $147,615,000 Dated: November 9,2010 REMARKETING MEMORANDUM and "REDEMPTION and "REDEMPTION BONDS". OF MORGAN STANLEY PRICE: 100% . emarketing of the Bonds. Certain legal matters will be passed upon passed upon will be legalmatters oftheBonds.Certain emarketing esponsible for the selection or correctness of the CUSIP number set number set theCUSIP of theselection orcorrectness for esponsible e State of Texas and the initial opinion of Fulbright & Jaworski & Jaworski opinionofFulbright ofe State Texasandtheinitial can Bankers Association. CUSIP data herein is provided by can Bankers Association. by CUSIP data is provided herein able for delivery through DTC on December 1, 2010. See See 2010. 1, December DTCon through fordelivery able data is not intended to create a database and does not serve not does and database create a to notintended data is ters under "TAX MATTERS" herein. See Appendix E. E. Appendix See herein. MATTERS" "TAX under ters Fth AA+/F1+ Aa2/VMIG 1 Standard&Poor's AA-/A-1+ Moody's Fitch al opinion delivered on November 18, 2004 and and 2004 18, November on delivered opinion al See "RATINGS" herein See "RATINGS" RATINGS: herein, will not haveadverse an affectthe on December 1, 2027 ust TERM MODE SUMMARY

The Bonds will be (i) remarketed in the Term Mode, during which period the Bonds will bear interest at a two-year Term Rate from December 1, 2010 through November 30, 2012, and for successive two-year interest rate periods thereafter at Term Rates determined by the Remarketing Agent, and (ii) while in the Term Mode, subject to mandatory tender and purchase and also to optional redemption, on the Business Day after each interest rate period and upon certain events described herein at the option of the Liquidity Bank. The mode or duration of interest rate periods for the Bonds or portions thereof may be changed at the direction of the City on conditions described herein whenever the Bonds are subject to optional redemption. See "THE BONDS – INTEREST - Conversion of Interest Modes" herein.

INTEREST RATE: The Bonds will bear interest at a two-year Term Rate from December 1, 2010 through November 30, 2012, and for each successive two-year interest period thereafter (unless changed as described herein) at the Term Rate determined by the Remarketing Agent not later than the business day preceding such interest rate period. Each such Term Rate will be the lesser of 7% per annum (unless the Liquidity Facility then in effect under the Ordinance covers a different rate of interest) or the Market Rate, which is the minimum per annum interest rate for the relevant interest rate period that, in the judgment of the Remarketing Agent, is necessary to produce a bid for the Bonds equal to 100% of principal amount plus accrued interest, if any. The determination of Term Rates by the Remarketing Agent will be conclusive and binding on the owners of the Bonds.

INTEREST Interest on the Bonds while in the Term Mode is payable on each June 1 and December 1, beginning June 1, 2011. On PAYMENT DATES: each interest payment date, interest is paid through the preceding day.

MANDATORY The Bonds or portions thereof in a Term Mode must be tendered to and purchased by the Paying Agent/Registrar from TENDER FOR and to the extent of the sources of funds described below at a price equal to 100% of principal amount plus accrued PURCHASE; interest, if any, (a) on the Business Day after each interest rate period, and (b) in the event of termination on prior notice REDEMPTION: of liquidity support as described herein, on other dates. See "THE BONDS – PURCHASE OF BONDS - Mandatory Tender" herein. While bearing interest at a Term Rate for interest rate periods of two years or less, the Bonds may be redeemed by the City only on the Business Day after each interest rate period.

SOURCES OF The Bonds are special obligations of the City payable from and secured, together with the currently outstanding Junior PAYMENT: Lien Obligations, solely by a junior and inferior lien on and pledge of the Net Revenues of the Systems.

The purchase price of the Bonds tendered for purchase will be payable solely from proceeds derived from the remarketing of the Bonds or, to the extent such proceeds are insufficient, payments made by BNP Paribas or any successor Liquidity Bank under the Liquidity Facility described herein, or, if such funds are insufficient, from payments, if any, elected to be made by the City in its sole discretion. The Liquidity Facility expires on December 6, 2012, unless sooner extended or replaced. Under certain circumstances, the Liquidity Facility may be suspended or terminated without prior notice, following which no person will be committed to purchase tendered Bonds. See "STANDBY BOND PURCHASE AGREEMENT – Termination or Suspension of Commitment" herein.

Principal and interest on the Bonds are payable solely from and, together with the currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued by the City, are equally and ratably secured by a junior lien on and pledge of the Net Revenues of the Systems remaining after payment of certain currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued by the City.

On November 4, 2010, the City issued its $300,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, TAXABLE SERIES 2010A (DIRECT SUBSIDY – BUILD AMERICA BONDS) and its $200,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE REFUNDING BONDS, TAXABLE SERIES 2010B (DIRECT SUBSIDY – BUILD AMERICA BONDS) as obligations secured by and payable from a junior lien on and pledge of the net revenues of the Systems on parity with outstanding Junior Lien Obligations (including the Bonds) and any Additional Junior Lien Obligations hereafter issued. This Remarketing Memorandum, however, describes only the Bonds and not these other series of bonds. Investors interested in purchasing these other bonds should review the Official Statement of the City relating thereto.

LIQUIDITY If the Liquidity Facility is replaced or otherwise released, or if the Liquidity Facility expires or is terminated on prior FACILITY notice to the Paying Agent/Registrar, the Bonds must first be tendered to and purchased by the Paying Agent/Registrar SUBSTITUTION: from the sources of funds described above. The Liquidity Facility may be replaced or released at the option of the City only on a date on which the Bonds are subject to optional redemption.

NOTICES: The Paying Agent/Registrar must give DTC at least 30 days notice of mandatory tender, redemptions, and changes in interest rate ceilings, and must give rating agencies at least ten Business Days notice of substitutions and extensions of the Liquidity Facility and the addition of or any change in any Credit Facility for the Bonds. Beneficial owners may receive a copy of such notices and other information directly by registering with the Paying Agent/Registrar. For information concerning certain other notices that the City and the Board have agreed to provide, see "CONTINUING DISCLOSURE OF INFORMATION – Material Event Notices" and "– Availability of Information" herein.

i CONTACT INFORMATION

Remarketing Agent: Tender Agent and Paying Agent/Registrar:

Morgan Stanley & Co. Incorporated U.S. Bank National Association Ms. Mary Lou Coriasco Mr. Israel Lugo Remarketing Coordinator 14241 Dallas Parkway, Suite 490 1221 Avenue of the Americas, 30th Floor Dallas, TX 75254 New York, NY 10020 (972) 458-4505 (212) 761-1533 [email protected] [email protected]

City Public Service Board: Liquidity Bank:

CPS Energy BNP Paribas Mr. David C. Jungman Mr. Arthur Alano Senior Director Finance 525 Washington Blvd, 9th Floor Mail Drop 100602 Jersey City, NJ 07310 P.O. Box 1771 (201) 850-5541 San Antonio, TX 78296-1771 [email protected] (210) 353-4861 [email protected]

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ii CITY OF SAN ANTONIO, TEXAS

CITY COUNCIL

Julián Castro, Mayor

Elisa Chan Philip A. Cortez Justin Rodriguez Mary Alice P. Cisneros Ray Lopez Ivy Taylor John G. Clamp David Medina Reed Williams Jennifer V. Ramos

Sheryl Sculley – City Manager Ben Gorzell, Jr. – Chief Financial Officer Leticia M. Vacek – City Clerk Michael D. Bernard – City Attorney

CITY PUBLIC SERVICE BOARD OF SAN ANTONIO

Charles E. Foster, Chairman1 Derrick Howard, Vice Chairman Stephen S. Hennigan, Trustee1 Homer Guevara, Jr., Trustee Julián Castro, Mayor

Doyle N. Beneby – President & CEO Paula Y. Gold-Williams – Treasurer, Executive Vice President and Chief Financial Officer Carolyn E. Shellman, Esq. – Secretary, Executive Vice President and General Counsel

CONSULTANTS

Fulbright & Jaworski L.L.P. Public Financial Management, Inc. and Bond Counsel Estrada Hinojosa & Company, Inc. Co-Financial Advisors

1) See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System – Nuclear Cost Issue and CPS Energy Internal Investigation" herein.

iii USE OF INFORMATION

No dealer, broker, salesman, or other person has been authorized by the City to give any information or to make any representation with respect to the Bonds, other than as contained in this Remarketing Memorandum, and if given or made, such other information or representations must not be relied upon as having been authorized by the City. This Remarketing Memorandum does not constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation, or sale. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Remarketing Memorandum nor any sale made shall under any circumstances create any implication that there has been no change in the information or opinions set forth herein after the date of this Remarketing Memorandum. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the undertaking of the City and the Board to provide certain information on a continuing basis.

THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THESE BONDS HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION FOR THE PURCHASE THEREOF.

IN CONNECTION WITH THIS OFFERING, THE REMARKETING AGENT MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS AT A LEVEL ABOVE THAT WHICH MIGHT PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

The Remarketing Agent has provided the following sentence for inclusion in this Remarketing Memorandum. The Remarketing Agent has reviewed the information in this Remarketing Memorandum in accordance with, and as part of their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Remarketing Agent does not guarantee the accuracy or completeness of such information.

The Co-Financial Advisors have provided the following sentence for inclusion in this Remarketing Memorandum. The Co-Financial Advisors have reviewed the information in this Remarketing Memorandum in accordance with, and as part of their responsibilities to the City and as applicable to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Co-Financial Advisors do not guarantee the accuracy or completeness of such information.

None of the City, the Co-Financial Advisors, nor the Remarketing Agent make any representation or warranty with respect to the information contained in this Remarketing Memorandum regarding The Depository Trust Company or its Book-Entry-Only System.

The agreements of the City and others related to the Bonds are contained solely in the contracts described herein. Neither this Remarketing Memorandum nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchasers of the Bonds.

THE COVER PAGE CONTAINS CERTAIN INFORMATION FOR GENERAL REFERENCE ONLY AND IS NOT INTENDED AS A SUMMARY OF THIS OFFERING. INVESTORS SHOULD READ THE ENTIRE REMARKETING MEMORANDUM, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION.

NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE BONDS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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iv TABLE OF CONTENTS

Page Page Historical Record of City of San Antonio General Introductory Statement ...... 1 Fund Benefits from City’s Electric and Gas Utility Systems ...... 32 The Bonds...... 2 Five-Year Electric and Gas Sales by Customer Category...... 33 General...... 2 Five-Year Statement of Net Revenues and Debt Service Coverage ... 34 Interest...... 3 Forward-Looking Statements ...... 35 General...... 3 Management Discussion...... 35 Daily Mode ...... 4 Implementation of New Accounting Policies ...... 35 Weekly Mode...... 4 Pension and Other Post Employment Benefits ...... 37 Commercial Paper Mode...... 4 Pension Plan...... 37 Auction Mode ...... 5 Employee Benefit Plans ...... 37 Term Mode...... 5 Pension and OPEB Liabilities ...... 37 Fixed Mode ...... 6 Actuarial Value of Plan Assets...... 37 Bank Bonds...... 6 Actuarial Accrued Liability...... 38 Market Rate Determination; Maximum Rate ...... 6 Use of Assumptions and Estimates ...... 38 Conversion of Interest Modes ...... 7 Pension and Employee Benefit/OPEB Funding ...... 38 Determination of Interest Rate Periods...... 7 Pension and Employee Benefit Plans...... 39 Notice of Interest Rates and Interest Modes...... 8 Certain Factors Affecting the Electric Utility Industry...... 40 Effect of Determinations ...... 8 The Electric Utility Industry Generally...... 40 Purchase of Bonds...... 8 Federal Energy Legislation ...... 40 Optional Tender ...... 8 FERC Authority ...... 41 Mandatory Tender...... 9 ERCOT ...... 42 Tender Procedures ...... 9 Electric Utility Restructuring in Texas; Senate Bill 7 ...... 43 Limitations on Payment of Purchase Price...... 10 Entities that have Opted-in to Competition ...... 43 Untendered Bonds...... 10 Additional Impacts of Senate Bill 7 ...... 44 Redemption of Bonds ...... 10 Post Senate Bill 7 Wholesale Market Design Developments ...... 45 Mandatory Sinking Fund Redemption ...... 10 Environmental Restrictions of Senate Bill 7 and Optional Redemption ...... 10 Other Related Regulations ...... 46 Mandatory Redemption of Bank Bonds...... 11 Response to Competition...... 47 Redemption Procedures ...... 11 Strategic Planning Initiatives ...... 48 Summary of Short-Term Modes ...... 12 Debt and Asset Management Program ...... 48 Bond Provisions ...... 13 Current Economic Developments ...... 49 Authority and Security for the Bonds...... 13 Construction Program...... 50 Sources of and Security for Payment ...... 13 Description of Physical Property...... 51 Perfection of Security for the Bonds ...... 13 Electric System ...... 51 Flow of Funds ...... 14 Generating Plants...... 51 Rate Covenant...... 14 Generating Station Events...... 52 Additional Bonds ...... 14 Generating Capability...... 54 Amendments ...... 15 New Generation / Conservation...... 54 Defeasance ...... 15 South Texas Project ...... 55 Registered Owners’ Remedies ...... 15 Five-Year South Texas Project Capacity Factor ...... 56 Book-Entry-Only System...... 16 Used Nuclear Fuel Management...... 57 Use of Certain Terms in Other Sections Additional Nuclear Generating Opportunities ...... 57 of this Remarketing Memorandum...... 18 Nuclear Cost Issue and CPS Energy Internal Standby Bond Purchase Agreement...... 18 Investigation ...... 60 Purchase Commitment...... 18 Qualified Scheduling Entity...... 62 Termination or Suspension of Commitment...... 18 Transmission System ...... 62 Release and Substitution...... 19 Interconnected System...... 62 The Bank ...... 19 Distribution System ...... 63 Remarketing Agreement ...... 19 Gas System ...... 63 Debt Service Requirements...... 20 Transmission System ...... 63 Outstanding Senior Lien Obligations and Junior Lien Distribution System ...... 63 Obligations...... 20 Proposed Rule Relating to Replacement of Gas Historical Net Revenues and Coverage ...... 21 Distribution Facilities ...... 64 Junior Lien Obligations ...... 22 Other Electric and Gas Systems Statistics...... 64 Commercial Paper Program...... 22 General Properties...... 64 Flexible Rate Revolving Note Private Placement Program...... 23 Operation Control System...... 64 San Antonio Electric and Gas Systems...... 24 Support Facilities...... 64 History and Management...... 24 General Offices and Customer Service Centers ...... 64 Citizens Advisory Committee...... 24 Construction Centers and Service Centers...... 65 Administration and Operating Personnel...... 25 Assembly Building ...... 65 Service Area ...... 28 Vehicles and Work Equipment ...... 65 Customer Base as of July 31, 2010...... 29 Summary of Insurance Programs...... 65 Retail Service Rates...... 29 Environmental Matters ...... 66 Transmission Access and Rate Regulation ...... 30 Federal Clean Air Act ...... 66 Customer Rates...... 31 Federal Clean Water Act...... 70 Fuel and Gas Cost Adjustment ...... 31 Water Conservation...... 71 Governmentally Imposed Fees, Taxes or Payments ...... 31 Other Environmental Issues ...... 71 Ten-Year Electric Customer Statistics ...... 32

v TABLE OF CONTENTS (Continued)

Page Page

Recent Events ...... 71 Compliance with Prior Undertakings ...... 87 Ward Transformer Superfund Site ...... 72 Receipt of Notice of Internal Revenue Service Audits ...... 88 Energy Conservation and Public Safety Programs...... 72 Legal Matters...... 88 Fuel Supply...... 73 Tax Matters ...... 89 Lease Transaction ...... 75 Legal Investments in Texas ...... 89 Acquisition of FSA by AGM, Recent Developments Concerning Securities Laws ...... 90 AGM, and Company Capitalization ...... 76 Ratings ...... 90 Potential Excise Tax Adversely Affecting the City and CPS Energy .77 Co-Financial Advisors...... 90 Litigation ...... 77 Independent Auditors ...... 90 The City of San Antonio...... 77 Use of Information in Remarketing Memorandum...... 91 Systems Litigation and Claims ...... 79 Miscellaneous...... 91 Wholesale Power Marketing...... 81 Appendix A -- City of San Antonio, Texas- Enterprise Risk Management...... 81 General Demographic and Economic Information...... A-1 Investments...... 82 Appendix B -- City Public Service - Audited Financial Statements Operating Funds ...... 82 for the Fiscal Years Ended January 31, 2010 and 2009 and STP Decommissioning Funds ...... 83 Independent Auditors’ Report...... B-1 STP Decommissioning Trust...... 83 Appendix C -- City Public Service - Unaudited Financial Statements Master Trust (TCC Funded) ...... 84 for the Quarter and Twelve Months Ended July 31, 2010 Investment Policies...... 84 and 2009...... C-1 Additional Provisions ...... 85 Appendix D -- Certain Provisions of the Ordinance ...... D-1 Continuing Disclosure of Information ...... 86 Appendix E -- Form of Initial Opinion of Co-Bond Counsel Annual Reports...... 86 and Form of Remarketing Opinion of Bond Counsel...... E-1 Material Event Notices...... 86 Appendix F -- The Liquidity Bank ...... F-1 Availability of Information...... 87 Limitations and Amendments...... 87

The cover page, subsequent pages hereof, and Appendices attached hereto, are part of this Remarketing Memorandum.

vi [THIS PAGE INTENTIONALLY LEFT BLANK] REMARKETING MEMORANDUM

Relating To $147,615,000 CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, SERIES 2004

INTRODUCTORY STATEMENT

This Remarketing Memorandum ("Remarketing Memorandum"), including the cover page and the Appendices hereto, of the City of San Antonio, Texas ("City"), provides information regarding the remarketing of its Electric and Gas Systems Junior Lien Revenue Bonds, Series 2004 in the aggregate principal amount of $147,615,000 ("Bonds"). The Bonds were initially authorized pursuant to an Ordinance adopted on November 4, 2004 ("Ordinance") to provide funds for the purposes of acquiring 300 additional megawatts of electric generating capacity in the South Texas Project, making other improvements to the Electric and Gas Utility Systems and paying the costs of issuance thereof. The Bonds are being remarketed pursuant to an ordinance adopted by the City Council of the City ("City Council") on October 21, 2010 ("Remarketing Ordinance"). Certain demographic and other information regarding the City are set forth in APPENDIX A. Certain capitalized terms used in this Remarketing Memorandum have the meanings described in APPENDIX D.

On November 4, 2010, the City issued its $300,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, TAXABLE SERIES 2010A (DIRECT SUBSIDY – BUILD AMERICA BONDS) and its $200,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE REFUNDING BONDS, TAXABLE SERIES 2010B (DIRECT SUBSIDY – BUILD AMERICA BONDS) as obligations secured by and payable from a junior lien on and pledge of the net revenues of the Systems on parity with Junior Lien Obligations (including the Bonds) and any Additional Junior Lien Obligations hereafter issued. This Remarketing Memorandum, however, describes only the Bonds and not these other series of bonds. Investors interested in purchasing these other bonds should review the Official Statement of the City relating thereto.

The City owns and operates electric and gas utility systems ("Systems"). Under the Ordinance, management and control of the Systems is completely vested in the City Public Service Board ("Board" or "CPS Energy") of the City, except for certain retained rights of the City Council to approve replacement trustees nominated by the Board, to issue debt, to adjust rates, and to review Board actions concerning research, development and planning.

The Bonds are special obligations of the City. Principal of and interest on the Bonds are payable solely from and to the extent of and are secured, together with currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued by the City, by a junior lien on and pledge of the Net Revenues of the Systems remaining after monthly payments or transfers to provide for the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations outstanding from time to time, but prior to the payment of the currently outstanding commercial paper obligations ("Commercial Paper Obligations" or "Notes"). The City has previously issued and there remains outstanding $4,100,135,000 aggregate principal amount of Senior Lien Obligations. After giving effect to the remarketing of the Bonds and the issuance of the two series of Additional Junior Lien Obligations described above, the City has $897,615,000 aggregate principal amount of currently outstanding Junior Lien Obligations. The City has reserved the right to issue Additional Senior Lien Obligations payable from a first and prior lien on and pledge of the Net Revenues, as well as Additional Junior Lien Obligations secured on parity with the Bonds and the currently outstanding Junior Lien Obligations from time to time in accordance with the provisions of the Ordinance described herein. The City may also issue obligations secured by inferior liens on Net Revenues of the Systems without limitation, including up to $450,000,000 currently authorized Commercial Paper Obligations, of which $130,000,000 was outstanding as of this date hereof and $100,000,000 in flexible rate revolving notes ("Flex Rate Notes"), of which there are currently $25,200,000 outstanding as of the date hereof.

The Bonds were remarketed as multi-modal variable rate bonds in a two-year Term Mode with an interest rate period extending to November 30, 2012. While in a Term Mode with such interest rate period, the Bonds will bear interest for interest rate periods extending through the day prior to each December 1 at the applicable Term Rate. The two-year Term Rate for the interest rate period specified on the cover page and each succeeding interest rate period will be determined by the Remarketing Agent on or before the business day preceding such interest rate period. While in a Term Mode, interest on the Bonds will be payable each June 1 and December 1. While the Bonds are in a Term Mode, they must be tendered by the owners for purchase and must be purchased by the Paying Agent/Registrar from and to the extent of the sources of funds described below, on the first Business Day after each interest rate period, at a price equal to 100% of principal amount plus accrued interest, if any, and will be subject to optional or mandatory redemption and to mandatory tender for 1 purchase under certain conditions on other dates as described herein. The interest rate mode for Bonds may be converted, in whole or in part, from the Term Mode to one or more different interest rate modes, or the duration of interest rate periods in the Term Mode may be changed, at the option of the City whenever the Bonds may be redeemed at the option of the City. Thereafter, the interest rates, interest rate periods, interest payment dates, and provisions for redemption and mandatory tender of the Bonds, as well as the rights of owners to have their Bonds purchased, may change.

The purchase price of Bonds tendered for purchase is payable solely from and to the extent of (1) proceeds of the remarketing of such Bonds by Morgan Stanley & Co. Incorporated, as "Remarketing Agent" for the Bonds, or any substitute Remarketing Agent or, if insufficient, (2) payments made under a standby bond purchase agreement ("Standby Bond Purchase Agreement") with BNP Paribas, acting through its San Francisco Branch ("Bank"), or any substitute liquidity facility provided to and accepted by the Paying Agent/Registrar in accordance with the Ordinance as described herein or, if insufficient, (3) payments, if any, elected to be made by the City in its sole discretion. The Standby Bond Purchase Agreement and any such substitute liquidity facility are referred to herein as the "Liquidity Facility". The Bank and the obligors on any substitute Liquidity Facility are referred to herein as the "Liquidity Bank". Under certain circumstances described herein, the Liquidity Facility may be terminated without prior notice, following which no person will be obligated to purchase tendered Bonds.

There follows in this Remarketing Memorandum a description of the City, CPS Energy, and the Systems; certain information relating to the City and the State of Texas ("State"); certain information relating to the sources of payment for the Bonds, together with summaries of certain provisions of the Ordinance and the Bonds; and a discussion of factors affecting electric utilities generally. All references herein to agreements and documents are qualified in their entirety by reference to the definitive forms thereof, and all references to the Bonds are further qualified by reference to the information with respect thereto contained in the Ordinance. Copies of such documents may be obtained from the City or Public Financial Management, Inc. and Estrada Hinojosa & Company, Inc. ("Co-Financial Advisors") upon request by electronic mail or upon payment of reasonable handling, mailing, and delivery expenses.

This Remarketing Memorandum speaks only as to its date, and the information contained herein is subject to change. A copy of the Remarketing Memorandum will be available from the Municipal Securities Rulemaking Board ("MSRB"), through its Electronic Municipal Market Access (EMMA) system. See "CONTINUING DISCLOSURE OF INFORMATION" for a description of the City's and the Board's undertaking to provide certain information on a continuing basis.

THE BONDS

The following is a summary of certain provisions of the Bonds, which are summarized further in the table entitled "SUMMARY OF SHORT-TERM MODES" herein.

GENERAL

The Bonds were remarketed in the aggregate principal amount of $147,615,000, will mature on December 1, 2027, are subject to mandatory and optional redemption, and will bear interest from December 1, 2010 or the most recent interest payment date therefor to which interest has been paid or duly provided for at the rate per annum determined as described herein. The Bonds are currently in a three-year Term Mode with an interest rate period extending from December 1, 2007 through November 30, 2010, and are subject to mandatory tender on December 1, 2010. The remarketed Bonds will remain in a Term Mode, during which they will bear interest at the per annum rate specified on the cover page for a two-year interest rate period commencing December 1, 2010 and extending through November 30, 2012, and will be subject to mandatory tender on December 3, 2012, being the first business day succeeding the expiration of this Term Rate period. Thereafter, while in a Term Mode, the Bonds will bear interest during successive two-year interest periods at a Term Rate determined by the Remarketing Agent. The mode of all or any part of the Bonds may be converted to a Daily Mode, Commercial Paper Mode, Auction Mode, Weekly Mode, or Fixed Mode, or the duration of interest rate periods for the Bonds in the Term Mode may be changed, as described herein. See "THE BONDS – INTEREST".

The Bonds will be issuable in fully registered form only, without coupons, in denominations of $5,000 and integral multiples of $5,000 if issued in the Term Mode or Fixed Mode, in denominations of $25,000 and any integral multiple thereof if issued in an Auction Mode, and in denominations of $100,000 and any integral multiple of $5,000 in excess thereof if issued in any other mode.

The principal of and interest on the Bonds will be paid to Cede & Co., as nominee for The Depository Trust Company, New York, New York ("DTC"), while it acts as securities depository for the Bonds. See "THE BONDS – BOND PROVISIONS - Book-Entry-Only System" below. If DTC resigns as or is removed from serving as securities depository 2 for the Bonds and is not replaced, principal and interest will be payable to the registered owners as of the applicable record date. U.S. Bank National Association, Houston, Texas, as the legal successor in interest to Wachovia Bank, National Association (together with successors, the "Paying Agent" or "Paying Agent/Registrar"), currently serves as the paying agent and registrar for the City with respect to the Bonds.

The beneficial owners of Bonds in a Weekly Mode or Daily Mode will have the right to have their interests in such Bonds purchased in (and leaving) authorized denominations, on demand with the notice described herein, and interests in Bonds in all modes other than the Fixed Mode must be tendered for purchase, at a price equal to 100% of principal amount plus accrued interest, if any, on the dates and conditions and with the notice, if any, described herein. See "THE BONDS – PURCHASE OF BONDS". The purchase price of any Bonds required to be purchased will be payable solely from and to the extent of (1) proceeds of the remarketing of such Bonds by the Remarketing Agent or, to the extent such proceeds are insufficient, (2) amounts advanced by the Bank under the Standby Bond Purchase Agreement or by the obligor on any substitute Liquidity Bank or, if such funds are insufficient, (3) payments, if any, elected to be made by the City in its sole discretion. The City is not obligated to pay the purchase price of tendered Bonds. The Standby Bond Purchase Agreement may be terminated without prior notice under certain conditions. See "STANDBY BOND PURCHASE AGREEMENT – Termination or Suspension of Commitment" herein.

The City has reserved the right, but is not obligated, to provide a letter of credit, policy of insurance, surety bond, acceptance, or guarantee to the Paying Agent/Registrar to support payment of the principal of and interest on the Bonds on at least 30 days notice to the registered owners of the Bonds. Any such obligation delivered to the Paying Agent/Registrar is referred to herein as the "Credit Facility", and the obligor on any such obligation is referred to herein as the "Credit Enhancer".

Morgan Stanley & Co. Incorporated has been appointed to serve as the Remarketing Agent for the Bonds. The Remarketing Agent may resign or be removed by the City. The City is then required to appoint a substitute remarketing agent unless the mode for all the Bonds has been converted to an Auction Mode or Fixed Mode. See "REMARKETING AGREEMENT" herein.

References to the Bonds herein include reference to any portion of a Bond in the applicable mode and interest rate period or to be redeemed or purchased. References to a "Business Day" for Bonds refer to a day other than (1) a Saturday or Sunday, (2) a day on which the New York Stock Exchange is closed, or (3) a legal holiday or the equivalent on which banking institutions generally are authorized or required to close in the city where principal of or interest on the Bonds is payable or in which the principal corporate trust office of the Paying Agent/Registrar or (unless such Bonds are in a Fixed Mode) the principal office of the Remarketing Agent or the applicable office of the Liquidity Bank, the Credit Enhancer, if any, or its agent for payment are located.

INTEREST

General

The Bonds will be remarketed as multi-modal variable rate demand bonds, in a Term Mode having a two-year interest rate period extending from December 1, 2010 to November 30, 2012, and for successive two-year interest periods thereafter unless changed as described herein. During such interest rate periods, the Bonds will bear interest at the applicable Term Rate described below under "Term Mode".

The mode for the Bonds or any portion thereof may be converted to a different mode, or to an Auction Mode or Term Mode with an interest rate period of different duration, at the direction of the City as described below under "Conversion of Interest Modes". Following such a conversion, such Bonds or portion thereof will bear interest at the corresponding Daily Rate, Weekly Rate, Auction Rate, Commercial Paper Rate, Term Rate, or Fixed Rate described below. Any such conversion (1) will be subject to receipt of an opinion of nationally recognized bond counsel (unless such conversion is between any two of a Daily Mode, Weekly Mode, Commercial Paper Mode or Term Mode with interest rate periods of one year) to the effect that such conversion will not adversely affect any exclusion of interest on any Bond from gross income for federal income tax purposes and is authorized by applicable Texas law and (2) will result in the mandatory tender of affected Bonds or portions thereof for purchase as described below under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender".

When Bonds bear interest at a Term Rate or Fixed Rate or an Auction Rate for interest rate periods of more than six months, interest on such Bonds will be computed on the basis of a 360-day year comprised of twelve 30-day months. When Bonds bear interest at a Daily Rate, Weekly Rate, Commercial Paper Rate, or Bank Rate, interest on such Bonds will be computed on the basis of a 365- or 366-day year, as applicable, for actual days elapsed. When Bonds bear interest at an Auction Rate for interest rate periods of six months or less, interest on such Bonds will be computed on the basis of 3 a 360-day year for actual days elapsed. Interest accruing on Bonds in each mode will be payable on the dates described below and on the Business Day following the conversion to a different mode. Interest due on each interest payment date will include interest accrued through the preceding day.

Daily Mode

On each day during which Bonds are in a Daily Mode, they will bear interest at the Daily Rate for the Bonds of such series and such day. The Daily Rate for the Bonds is a per annum rate of interest equal to the Market Rate determined by the Remarketing Agent by 10:00 a.m., New York, New York, time, on the applicable day (or, if such day is not a business day for the Remarketing Agent, on the immediately preceding such business day), but not more than the Maximum Rate. See "THE BONDS – INTEREST - Market Rate Determination; Maximum Rate" herein.

Interest accrued on Bonds in a Daily Mode will be payable on the first Business Day of each month, and the record date for such interest payment will be the immediately preceding day.

While in a Daily Mode, Bonds may be tendered to the Paying Agent/Registrar for purchase on the same Business Day upon the notice described below under "THE BONDS – PURCHASE OF BONDS - Optional Tender" and they may be redeemed or repurchased on any Business Day on not less than 20 days notice as described under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender" and "THE BONDS – REDEMPTION OF BONDS" herein.

Weekly Mode

When Bonds are in a Weekly Mode, they will bear interest at the Weekly Rate, which is a Market Rate determined by the Remarketing Agent for each one-week period, beginning on Wednesday of each week and ending on the Tuesday of the following week, but not more than the Maximum Rate. The Remarketing Agent is required to determine such rate by 4:00 p.m., New York, New York, time, on its last business day before the commencement of such Weekly Mode and on the day before each succeeding Wednesday thereafter (or, if not a business day for the Remarketing Agent, then on such Wednesday, or, if neither is a business day for the Remarketing Agent, then its last business day before such Wednesday, or on such other day as may be specified by such Remarketing Agent after notice to the City and the Bondholders). See "Market Rate Determination; Maximum Rate" herein.

Interest accrued on the Bonds while they are in a Weekly Mode will be payable on the first Business Day of each month, and the record date for such interest payment will be the immediately preceding day.

While in a Weekly Mode, Bonds may be tendered to the Paying Agent/Registrar for purchase on any Business Day upon seven days written notice as described below under "THE BONDS – PURCHASE OF BONDS - Optional Tender in Weekly Mode", and they may be redeemed or purchased on any Business Day upon not less than 20 days notice as described under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender" and "THE BONDS – REDEMPTION OF BONDS" herein.

Commercial Paper Mode

During each interest rate period for Bonds in a Commercial Paper Mode, they will bear interest at the Commercial Paper Rate for such interest rate period. The Commercial Paper Rate for an interest rate period in a Commercial Paper Mode is the Market Rate for such interest rate period determined by the Remarketing Agent by 12:30 p.m., New York, New York, time, on or before its first Business Day in the interest rate period, but not more than the Maximum Rate. The duration of each interest rate period in a Commercial Paper Mode may be from one to 270 calendar days and will be determined by the Remarketing Agent as described below under "Determination of Interest Rate Periods".

Interest accrued on Bonds during each interest rate period while they are in a Commercial Paper Mode will be payable on the first Business Day following such interest rate period, and the record date for such interest payment will be the immediately preceding day.

While Bonds are in a Commercial Paper Mode, they may not be tendered to the Paying Agent/Registrar for purchase at the option of the owner. Bonds in a Commercial Paper Mode will, however, be required to be tendered for purchase on the Business Day following each interest rate period therefor without further notice and otherwise as described below under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender". Bonds in a Commercial Paper Mode may only be redeemed on such a mandatory purchase date.

4 Auction Mode

During the initial interest rate period for Bonds in an Auction Mode, they will bear interest at the Market Rate determined by the Remarketing Agent on the preceding Business Day. During each ensuing interest rate period for Bonds in an Auction Mode, they will bear interest at the clearing rate bid at an auction for such Bonds conducted immediately prior to the rate period as described in the Ordinance. The resulting auction rates may not be less than 45% of reference rates for specified taxable high-grade securities of comparable term described in the Ordinance. If an auction is not held immediately prior to an interest rate period, such Bonds will bear interest at 300% of such reference rates, if a default in payment of the Bonds and under any Credit Facility exists, and otherwise 75-100% of such reference rates, depending on the credit ratings then assigned to the Bonds. If the conditions to an elected change in interest rate period for Bonds in an Auction Mode are not satisfied, they will bear interest at a rate equal to 75-100% of such reference rates, depending on the credit rating then assigned to the Bonds. In no event, however, may Bonds bear interest at a rate greater than 15% per annum in an Auction Mode, including the portion of interest payable to the Auction Agent as a service charge.

The duration of interest rate periods in an Auction Mode may be fixed by the City as daily periods, weekly periods, four- week periods, five-week periods, three-month periods, six-month periods or longer periods. The duration may be changed at the election of the City as described below under "Determination of Interest Rate Periods".

Interest accrued on Bonds in each interest rate period in an Auction Mode will be payable (i) if a daily rate period, on the next first Business Day of a month following the interest rate period, (ii) if a weekly, four-week, five-week, three-month, or six-month interest rate period, on the first Business Day after the interest rate period, and (iii) if a longer interest rate period, the first Business Day after each thirteenth Tuesday in the period and the first Business Day after the period. The record date for such interest payment will be the second preceding Business Day.

While in an Auction Mode, Bonds may be required to be tendered for purchase pursuant to auction procedures provided in the Ordinance and as described below under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender", but are not subject to purchase on demand of the owner.

Term Mode

During each interest rate period during which Bonds are in a Term Mode, they will bear interest at the Term Rate for such interest rate period. While the Bonds bear interest for the two-year interest period described in this Remarketing Memorandum, such interest rate period will extend from December 1, 2010 through November 30, 2012, and for successive two-year interest periods thereafter unless changed as described herein. However, if a change to the terms of the Bonds or liquidity or credit support, if any, is made in connection with the remarketing at the end of an interest rate period and the City does not deliver to the Paying Agent/Registrar an opinion of a nationally recognized bond counsel that the tax-exempt status of interest on the Bonds will not be adversely affected, then subsequent interest rate periods will extend for the same number of years as the previous interest rate period.

The duration of each interest rate period in each Term Mode for Bonds may be changed by the City whenever such Bonds are subject to optional redemption, but must be one year or more and will extend through November 30, as described below under "Determination of Interest Rate Periods".

The Term Rate for each interest rate period in a Term Mode is the Market Rate for such interest rate period determined by the Remarketing Agent on any day designated by the Remarketing Agent which is not more than 35 days preceding nor later than the last business day preceding such interest rate period, but not more than the Maximum Rate. See "Market Rate Determination; Maximum Rate" below.

Interest accrued on Bonds during any interest rate period while they are in a Term Mode will be payable semi-annually on each June 1 and December 1, commencing in the current Term Mode (with the next such payment date being June 1, 2011), and the record date therefor will be the 15th calendar day of the preceding calendar month or the first day of such Term Mode, whichever is later.

While Bonds are in a Term Mode, they may not be tendered to the Paying Agent/Registrar for purchase at the option of the owner. They will, however, be required to be tendered for purchase on the Business Day after each interest rate period as described below. They will also be subject to mandatory sinking fund and optional redemption on such Business Days as described herein and to mandatory tender for purchase at other times upon certain events at the option of the Liquidity Bank. See "THE BONDS – REDEMPTION OF BONDS" and "THE BONDS – PURCHASE OF BONDS - Mandatory Tender". 5 Fixed Mode

When Bonds are in a Fixed Mode, they will bear interest at the Fixed Rate for such Bonds. The Fixed Rate for Bonds is the Market Rate for such Bonds determined by the Remarketing Agent on any day designated by it which is not more than 35 days preceding nor later than its last business day preceding the Fixed Mode for such Bonds. The Fixed Mode for Bonds, once commenced, will extend to the final maturity of such Bonds and will comprise a single interest rate period.

Interest accrued on Bonds in a Fixed Mode will be payable semi-annually on each June 1 and December 1, and the record date for such interest payment will be the 15th calendar day of the preceding calendar month or the first day of such Fixed Mode, whichever is later.

While in a Fixed Mode, Bonds may not be tendered for purchase at the option of the owner. They will, however, be subject to mandatory sinking fund redemption and optional redemption at the times and price and in the amounts described herein under "THE BONDS – REDEMPTION OF BONDS".

Bank Bonds

Tendered Bonds purchased through the Liquidity Facility and not remarketed ("Bank Bonds") will bear interest at the Bank Rate, rather than the Daily Rate, Weekly Rate, Commercial Paper Rate, Auction Rate, Term Rate, or Fixed Rate from time to time in effect, but the excess of interest accrued at the Bank Rate over interest that would have accrued at such other rate ("Bank Differential") will be payable to the Liquidity Bank or its assignees rather than to the registered owner of the Bond as of the record date for such interest. Accordingly, payments of interest made through Cede & Co. on interest payment dates or redemption dates, and payments of purchase price due on the tender of Bonds for purchase or in determining the Market Rate, will exclude Bank Differential, whether or not expressly stated elsewhere herein. Bank Bonds may be redeemed in whole or in part on any day and are not subject to optional or mandatory tender for purchase.

Market Rate Determination; Maximum Rate

The Remarketing Agent is required to make each determination of the "Market Rate" for such Bonds by determining, under prevailing market conditions, the minimum interest rate necessary, in the judgment of the Remarketing Agent, to be borne by such Bonds for the relevant interest rate period to produce a bid for such Bonds equal to 100% of the principal amount thereof plus accrued interest, if any.

If for any reason no Remarketing Agent has been appointed under the Ordinance on any rate determination date, the Remarketing Agent fails to determine a Market Rate on such rate determination date, or any Market Rate determined by the Remarketing Agent on such rate determination date is determined by a court of competent jurisdiction to be invalid or unenforceable, the Market Rate to be determined by the Remarketing Agent on such rate determination date will be determined as follows: If the interest rate period during which such Market Rate is to be in effect is greater than one-half year, the Market Rate for such interest rate period will be the percentage of the 11-Bond Municipal Bond Index most recently published by The Bond Buyer or any successor publication set forth below under the longest period specified which does not exceed the duration of such interest rate period:

Interest rate period equal to or longer than (in years) 15 13 10 7 5 2 1/2 100% 97% 93% 86% 80% 70% 65%

If the interest rate period during which such Market Rate is to be in effect is equal to or less than one-half year, the Market Rate for such interest rate period will be the Municipal Swap Index most recently announced by The Bond Market Association. If either of such indices ceases to be published, the most comparable published index designated by the City is required to be used for such Market Rate determination.

6 Notwithstanding any higher determination of a Market Rate, the rate of interest to be borne by Bonds in any interest rate period in any mode may not exceed the Maximum Rate. The "Maximum Rate" is the lesser of 15% per annum or (except in an Auction Mode or Fixed Mode) the per annum rate of interest, if any, specified in the Liquidity Facility then in effect under the Ordinance as the rate at which money available to be drawn thereunder to pay interest on the Bonds in the applicable mode has been computed. The initial Liquidity Facility sets the Maximum Rate at 7% per annum.

Conversion of Interest Modes

The City is permitted to change the mode for all or any portion of the Bonds to a different mode or to an Auction Mode or Term Mode with an interest rate period of different duration (and, if the new interest rate mode is an Auction Mode or Term Mode, to designate the duration of the initial interest rate period). The first day of any mode designated by the City is required to be (i) if the mode then in effect for the Bonds to be converted is a Daily Mode or Weekly Mode, a Business Day, (ii) if the mode then in effect for the Bonds to be converted is a Commercial Paper Mode or Auction Mode, the last interest payment date for all interest rate periods for such Bonds then in effect or, in the case of a Commercial Paper Mode, any Business Day thereafter, and (iii) if a Term Mode is then in effect for the Bonds to be converted, any Business Day on which such Bonds may be redeemed at the option of the City as described under "THE BONDS – REDEMPTION OF BONDS - Optional Redemption" herein.

The mode, or the interest rate period during any Auction Mode or Term Mode, for Bonds may only be changed upon notice to the Bondholders as described below. No such change may be made unless (i) there is delivered to the Paying Agent/Registrar on the first day of such mode or interest rate period an opinion of nationally recognized bond counsel stating that the change will not adversely affect any exclusion of interest on any Bond income for federal income tax purposes (unless the change is between any two of a Daily Mode, Weekly Mode, Commercial Paper Mode, or Term Mode with an interest period of one year or less), and (ii) by 1:30 p.m., New York, New York, time on the date of such change the Paying Agent/Registrar or the Liquidity Bank has received the purchase price of all Bonds tendered or deemed tendered for purchase on such date in accordance with the procedures set forth below under "THE BONDS – PURCHASE OF BONDS" (or, in the case of a change in the duration of interest rate periods in an Auction Mode, clearing bids are made on the preceding Auction Date).

Determination of Interest Rate Periods

The interest rate period for a Bond during a Commercial Paper Mode will be determined by the Remarketing Agent, will commence on the first day of such mode for such Bond or on the day immediately succeeding the immediately preceding interest rate period for such Bond, and will not be less than one day nor more than 270 days in duration. No such interest rate period in a Commercial Paper Mode may cause the amount of interest due on all Bonds (other than Bonds in an Auction Mode or Fixed Mode) on the next interest payment date for such Bonds to exceed the coverage then afforded by the Liquidity Facility. In addition, no such interest rate period for any Bond in a Commercial Paper Mode may extend beyond a redemption date for Bonds in the Commercial Paper Mode unless the interest rate periods for at least the amount of the Bonds to be redeemed on such redemption date end on or before such date.

Each interest rate period for a Bond, which is in a Term Mode, will commence on the first day of such Term Mode or on the day after the immediately preceding interest rate period for such Bond during such mode. If the interest rate period for Bonds in a Term Mode is changed by the City as described above under "Conversion of Interest Modes", the initial interest rate period after the change will extend to the November 30 specified by the City which occurs at least two years after the effective date of such mode. Each successive interest rate period during such Term Mode will extend to (a) the anniversary of such date (if the City has not previously changed the interest rate period or interest mode and, either no change to the terms of the Bonds or liquidity or credit support are made in connection with the associated remarketing or in the opinion of nationally recognized bond counsel such change would not adversely affect the tax-exempt statues of interest on the Bonds) or (b) if these conditions are not met, the anniversary of such date which occurs the same number of 12-month periods after the first day of such interest rate period as the number of 12-month periods or portions thereof during the previous interest rate period in such Term Mode.

7 Notice of Interest Rates and Interest Modes

Bondholders may ascertain the current Daily Rate, Weekly Rate, or Commercial Paper Rate for Bonds by contacting the Remarketing Agent, may ascertain the current Auction Rate for Bonds by contacting the Auction Agent, and may ascertain the current Term Rate or Fixed Rate for Bonds by contacting the Paying Agent/Registrar. The Paying Agent/Registrar is required to provide to each beneficial owner of a Bond in a Daily Mode or Weekly Mode, upon request, the interest rates in effect since the preceding interest payment date.

The City or the Paying Agent/Registrar must give notice of the following events to the registered owners of Bonds: (i) the effective date of any change in the method of determining the rate determination date (or maximum rate) for any Bond, (ii) the first day of any Interest Mode (other than the initial Term Mode), (iii) the first day of any change in the interest rate period for any Bond or portion thereof in an Auction Mode or Term Mode. Such notice must be given not less than 20 days and not more than 60 days prior to the effective date of such change while the affected Bonds are in a Daily Mode, Weekly Mode, or Auction Mode and not less than 30 days and not more than 60 days prior to the effective date of such change while the affected Bonds are in another Interest Mode. The notice must state that the change will occur and the effective date of the change.

While the Bonds are registered in the name of Cede & Co., as nominee for DTC, the foregoing notices will be given to Cede & Co. only, which alone will be responsible for providing such notices to the beneficial owners. See "THE BONDS – BOND PROVISIONS - Book-Entry-Only System" herein. However, beneficial owners may register to receive such information directly by contacting the Paying Agent/Registrar. See "CONTINUING DISCLOSURE OF INFORMATION" herein.

Effect of Determinations

Each designation of a mode or the duration of an interest rate period and each determination of a Daily Rate, Weekly Rate, Commercial Paper Rate, Auction Rate, Term Rate, or Fixed Rate will be conclusive and binding upon the owners of the affected Bonds, and neither the City nor the Remarketing Agent nor the Paying Agent/Registrar will have any liability for any such determination, whether due to any error in judgment, failure to consider any information, opinion, or resource, or otherwise.

If any proposed change in the mode or interest rate period for any Bond designated by the City may not be effected because of any failure to satisfy the conditions to such change contained in the Ordinance, (1) the mode for such Bond will change automatically to the Weekly Mode (unless only the duration of interest periods in an Auction Mode is proposed to be changed, in which case the ensuing interest period will be a weekly period), if the preceding mode for such Bond was a Daily Mode, Weekly Mode, Commercial Paper Mode, or Term Mode with an interest period of one year, or in the opinion of nationally recognized bond counsel such change will not adversely affect any exclusion of interest on any Bond from the gross income of the owner thereof for federal income tax purposes, and (2) otherwise the mode (and the interest rate period in any Auction Mode or Term Mode) then in effect for such Bond will remain unchanged and, except for any tender required by the provisions described below under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender", the owners of the affected Bonds will be restored to their original positions.

PURCHASE OF BONDS

Optional Tender

The beneficial owners of Bonds in a Daily Mode or Weekly Mode will have the right to have their beneficial interests in such Bonds (or portions thereof equal to, and leaving untendered, an authorized denomination) purchased by the Paying Agent/Registrar, at a purchase price equal to 100% of principal amount plus accrued interest (payable from the limited sources of funds described below), if any, as follows:

Daily Mode. While in a Daily Mode, any Bond (or portion thereof) may be tendered to the Paying Agent/Registrar for purchase, as described above, on any Business Day by:

(1) delivering notice of such tender as described below by telephone, facsimile or other electronic means to the Remarketing Agent by 11:00 a.m., New York, New York, time, on such Business Day; and

(2) tendering such Bond (or portion) to the Paying Agent/Registrar as described below by 12:00 noon, New York, New York, time, on the purchase date. 8 Weekly Mode. While in a Weekly Mode, any Bond (or portion thereof) may be tendered to the Paying Agent/Registrar for purchase, as described above, on any Business Day by:

(1) delivering notice of tender (which shall be irrevocable and effective upon receipt) to the Remarketing Agent and the Paying Agent/Registrar in writing or by facsimile or other electronic means by 4:00 p.m., New York, New York, time, on a Business Day which is at least seven days prior to the purchase date; and

(2) tendering such Bonds to the Paying Agent/Registrar as described below by 12:00 noon, New York, New York, time, on the purchase date.

Payment for Bonds tendered for purchase is required to be made in immediately available funds by the close of business on the purchase date. Each notice of the optional tender of the Bonds must state the principal amount of the Bonds to be tendered, the mode then in effect for such Bonds, the purchase date, the name of the registered owner (and, while the Bonds are registered in the name of Cede & Co. or any alternate securities depository or its nominee, the name and number of the account to which such Bond is credited by the securities depository). Notice of tender should be delivered to the address of the Remarketing Agent and, if applicable, the Paying Agent/Registrar shown under "CONTACT INFORMATION". The addresses may be changed by notice mailed to the registered owners of the Bonds at their registered addresses.

Mandatory Tender

Each owner of Bonds will be required to tender, and in any event will be deemed to have tendered, such Bonds (or the applicable portion thereof described below) to the Paying Agent/Registrar for purchase at a purchase price equal to 100% of the principal amount plus accrued interest, if any (payable from the limited sources of funds described below), on

Substitution of Liquidity Facility or Credit Facility: the last Business Day on or before any proposed release of the Liquidity Facility (unless such Bonds or portions thereof are in an Auction Mode or the Fixed Mode) or any Credit Facility upon replacement with an alternate Liquidity Facility or Credit Facility at the option of the City (which may only occur on the Business Day following each interest rate period in a Term Mode), as described herein under "STANDBY BOND PURCHASE AGREEMENT – Release and Substitution",

Mode Changes: the first Business Day of each new mode for such Bonds or portions thereof designated by the City, whether or not such new mode is effected,

Rate Adjustment Dates: the first Business Day of each interest rate period for such Bonds or portions thereof while they are in a Commercial Paper Mode or a Term Mode, and

Termination of Liquidity Facility or Credit Facility: the third Business Day prior to the expiration of the Liquidity Facility (unless such Bonds are in an Auction Mode or the Fixed Mode) or any Credit Facility or prior to the date of termination of the obligation of the Liquidity Bank under the Liquidity Facility (unless such Bonds are in an Auction Mode or the Fixed Mode) or the Credit Enhancer under any Credit Facility on advance notice to the Paying Agent/Registrar, as described herein under "STANDBY BOND PURCHASE AGREEMENT – Release and Substitution".

The Paying Agent/Registrar is required to give notice of mandatory tender (other than mandatory tender at the end of interest rate periods for Bonds in a Commercial Paper Mode) to each registered owner of the Bonds affected thereby by mail, first class postage prepaid, not more than 60 nor less than 20 days, if such Bond is in a Daily Mode, Weekly Mode, or Auction Mode, and not more than 60 nor less than 30 days, if such Bond is in any other mode, prior to each mandatory tender date. While the Bonds are registered in the name of Cede & Co., only Cede & Co. will receive such notice from the Paying Agent/Registrar. See "THE BONDS – BOND PROVISIONS - Book-Entry-Only System" herein. However, beneficial owners may register to receive such information directly by contacting the Paying Agent/Registrar. See "CONTINUING DISCLOSURE OF INFORMATION" herein.

Tender Procedures

While the Bonds are all registered in the name of Cede & Co., as nominee for DTC, Bondholders may tender Bonds for purchase by giving DTC sufficient instructions to transfer beneficial ownership of such Bonds to the account of the Paying Agent/Registrar against payment. 9 Limitations on Payment of Purchase Price

The Paying Agent/Registrar will be required to effect purchases of tendered Bonds solely from and to the extent of (1) proceeds of the remarketing of such Bonds pursuant to the applicable Remarking Agreement, or, to the extent such proceeds are insufficient, (2) amounts drawn under or derived from the Liquidity Facility, if such Bonds are eligible for advances thereunder, or, to the extent that such amounts are insufficient, (3) payments, if any, elected to be made by the City in its sole discretion. For additional information regarding the Liquidity Bank's commitment to purchase tendered Bonds, see "STANDBY BOND PURCHASE AGREEMENT" herein. The City will have no obligation and has no intent to purchase tendered Bonds. No purchase right will pertain to Bank Bonds or Bonds registered in the name or held for the benefit or account of the City or certain affiliates.

Under certain circumstances, the Liquidity Bank's obligation to purchase tendered Bonds may terminate or be suspended without prior notice. See "STANDBY BOND PURCHASE AGREEMENT – Termination or Suspension of Commitment" herein. In those circumstances, the right to have Bonds purchased on demand will effectively be suspended.

Untendered Bonds

ANY BOND (OR PORTION THEREOF) WHICH IS REQUIRED TO BE TENDERED AS DESCRIBED UNDER "THE BONDS – PURCHASE OF BONDS - MANDATORY TENDER" ABOVE OR FOLLOWING NOTICE OF TENDER AS DESCRIBED ABOVE UNDER "THE BONDS – PURCHASE OF BONDS - OPTIONAL TENDER" AND FOR WHICH PAYMENT OF THE PURCHASE PRICE IS DULY PROVIDED FOR ON THE RELEVANT PURCHASE DATE WILL BE DEEMED TO HAVE BEEN TENDERED AND SOLD ON SUCH PURCHASE DATE, AND THE HOLDER OF SUCH BOND WILL NOT THEREAFTER BE ENTITLED TO ANY PAYMENT (INCLUDING ANY INTEREST ACCRUED SUBSEQUENT TO SUCH PURCHASE DATE) IN RESPECT THEREOF OTHER THAN THE PURCHASE PRICE FOR SUCH BOND OR PORTION OR OTHERWISE BE SECURED BY OR ENTITLED TO ANY BENEFIT UNDER THE ORDINANCE.

REDEMPTION OF BONDS

Mandatory Sinking Fund Redemption

The Bonds will be subject to mandatory sinking fund redemption by the City prior to their scheduled maturity at a redemption price equal to 100% of the principal amount thereof, without premium, on the first interest payment date for such Bonds on or after December 1 of the years and in the principal amounts indicated below:

Year Amount 2024 $38,000,000 2025 38,000,000 2026 38,000,000 20271 33,615,000 (final maturity) ______

(1) Represents amount that remains outstanding after effecting an optional redemption of $4,385,000 in Bonds on December 1, 2010.

The City may reduce the amount of Bonds so required to be redeemed on any date by the principal amount of outstanding Bonds which are either (i) purchased and surrendered to the Paying Agent/Registrar by the City for cancellation at least 60 days prior to such redemption date or (ii) selected not less than five days prior to the last day for mailing the notice of redemption pursuant to a mandatory redemption of Bank Bonds or the exercising of the Optional Redemption of the Bond prior to such date for optional redemption, if in either case such Bonds have not previously served as the basis for any such reduction.

Optional Redemption

The Bonds are subject to redemption prior to their stated maturity at the option of the City in whole or in part, at a redemption price equal to 100% of principal amount plus accrued interest, if any, on (i) any Business Day, if the Bonds to be redeemed bear interest at a Daily Rate or Weekly Rate, (ii) any rate adjustment date for the Bonds to be redeemed, if such Bonds are in a Commercial Paper Mode, Auction Mode, or Term Mode, (iii) the first day of the Fixed Mode for the Bonds to be redeemed, and (iv) any date, for Bank Bonds. 10 While in a Term Mode or Fixed Mode, Bonds are also subject to redemption prior to their stated maturity at the option of the City in whole or in part on any date after the no-call period shown below following the first day of the applicable interest rate period, at a price equal to 100% of principal amount plus accrued interest, if any:

Interest Rate Period in Term Mode or Fixed Mode

Equal to or But Less Greater Than Than No-Call Period 12 Years N/A 10 Years 9 Years 12 Years 8 Years 7 Years 9 Years 6 Years 5 Years 7 Years 4 Years 0 Years 5 Years 3 Years

The City may change the dates and prices for any such redemption prior to the rate determination date for such interest rate period, if the City receives an opinion of nationally recognized bond counsel to the effect that such change will not adversely affect any exclusion of interest on any Bond from gross income for federal income tax purposes.

Mandatory Redemption of Bank Bonds

The City is required to redeem Bank Bonds on the dates and in the amounts required by the Liquidity Facility. While the Standby Bond Purchase Agreement remains in effect, the Bank Bonds must be redeemed in eight semi-annual installments following expiration or termination of the Liquidity Bank's obligation to purchase tendered Bonds.

Redemption Procedures

Notice of each redemption of Bonds is required to be mailed not less than 20 days, if the Bonds to be redeemed are in a Daily Mode, Weekly Mode, or Auction Mode, not less than 30 days, if the Bonds to be redeemed are in any other mode, and in either case not more than 60 days prior to the redemption date to each registered owner of the Bonds to be redeemed at the address of such owner recorded in the bond register. If notice of redemption of any Bond is so given, such Bond (or the principal amount thereof to be redeemed) will be due and payable on the redemption date and, if funds sufficient to pay the redemption price are deposited with the Paying Agent/Registrar on the redemption date, will cease to bear interest after such date. While the Bonds are registered in the name of DTC or its nominee, as nominee for the beneficial owners, the foregoing notice will be given to DTC or such nominee only, which shall alone be responsible for providing such notice to the beneficial owners. See "THE BONDS – BOND PROVISIONS - Book-Entry-Only System" herein. However, beneficial owners may register to receive such notices directly by contacting the Paying Agent/Registrar. See "CONTINUING DISCLOSURE OF INFORMATION".

If less than all outstanding Bonds are to be redeemed, the City will redeem all Bank Bonds before redeeming any other Bonds. Except when held by DTC, its nominee, or any substitute securities depository, if less than all the Bonds (other than Bank Bonds) are to be redeemed, the Paying Agent/Registrar must select at random and by lot the Bonds to be redeemed as provided in the Ordinance.

11 SUMMARY OF SHORT-TERM MODES

Daily Mode Weekly Mode Commercial Paper Term Mode Interest First Business Day of month; First Business Day of First Business Day after Each June 1 and Payment Dates actual days over 365/366 day month; actual days over each interest rate period; December 1; 360-day year and Calculation year 365- or 366-day year actual days over 365- or of twelve 30-day months Method1 366-day year

Authorized $100,000 and integral $100,000 and integral $100,000 and integral $5,000 and integral Denominations multiples of $5,000 in excess multiples of $5,000 in multiples of $5,000 in multiples of $5,000 thereof excess thereof excess thereof

Rate Each business day for the Each business day for the First business day for the Not more than 35 days nor Determination Remarketing Agent (by 10:00 Remarketing Agent Remarketing Agent on or less than last business day Date a.m. New York, New York before each Wednesday before interest rate for the Remarketing Agent time) (by 4:00 p.m., New York, period (by 12:30 p.m., before interest rate period New York, time) New York, New York, time)

Interest Rate From Rate Determination Date Wednesday of one week Any duration from one to One year or longer with Period to next Rate Determination through Tuesday of the 270 days periods extending to Date following week November 30

Rate Each Rate Determination Date Each Wednesday First Business Day in First Business Day of each Adjustment each interest rate period interest rate period Date

Notice of Owners may contact the Owners may contact the Owners may contact the Owners may contact the Interest Rate Remarketing Agent to obtain Remarketing Agent to Remarketing Agent to Paying Agent/Registrar to interest rates obtain interest rates obtain interest rates obtain interest rates

Optional Tender Any Business Day Any Business Day at None None Dates least seven days after delivery of notice

Notice of Irrevocable telephone, Irrevocable written, None None Optional Tender facsimile or electronic notice facsimile, or electronic of tender to the Remarketing notice of tender to the Agent by 11:00 a.m., New Remarketing Agent and York, New York, time, on the Paying Agent/Registrar Purchase Date by 4:00 p.m., New York, New York, time, on any Business Day not less than seven days prior to the purchase date

Mandatory 2 2 Rate adjustment date2 Rate adjustment date2 Purchase Date

Permissible Any Business Day Any Business Day Any rate adjustment date Any rate adjustment date Optional and after scheduled call Redemption protection3 Dates

Notice of Mailed to DTC by the 20th day Mailed to DTC by 20th Mailed to DTC by 30th Mailed to DTC by 30th Mandatory before tender or redemption day before tender or day before tender or day before tender or Tender or date redemption date redemption date 4 redemption date Redemption

______(1) Interest is also payable on the first Business Day after the date of conversion of mode. (2) The Bonds are also subject to mandatory tender upon the events described under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender". (3) See "THE BONDS – REDEMPTION OF BONDS - Optional Redemption". (4) No notice for mandatory tender on Rate Adjustment Date.

12 BOND PROVISIONS

Authority and Security for the Bonds

The Bonds were issued and remarketed under the provisions of applicable laws of the State of Texas, including Texas Government Code, Chapters 1371 and 1502, as amended, the Ordinance, and the Remarketing Ordinance.

The Bonds are special obligations of the City payable solely from and equally and ratably secured, together with the currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued by the City, by a junior lien on and pledge of the Net Revenues of the Systems, subject and subordinate to liens and pledges securing the outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued, and superior to the pledge and lien securing the currently outstanding Commercial Paper Obligations and Inferior Lien Obligations, all as fully set forth in the Ordinance.

The Ordinance does not create a mortgage or other security interest on the property of the Systems. The Bonds are special obligations of the City, payable, together with the currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued by the City, only from a junior lien on the pledge of the Net Revenues of the Systems, and the taxing power of neither the City nor the State is pledged for the payment thereof.

Sources of and Security for Payment

The Bonds are special obligations of the City. Principal of and interest on the Bonds will be payable, together with the currently outstanding Junior Lien Obligations and any Additional Junior Lien Obligations hereafter issued by the City, solely from and to the extent of Net Revenues of the Systems remaining after monthly payments on and transfers to provide for the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations of the Systems outstanding from time to time.

To secure payment of the Bonds, together with the currently outstanding Junior Lien Obligations and the obligations of the City to the Liquidity Bank, in the Ordinance the City has granted a lien on and pledge of Net Revenues of the Systems, subject and subordinate to liens and pledges securing the Senior Lien Obligations now outstanding and any Additional Senior Lien Obligations hereafter issued in accordance with the provisions of the Ordinance, but prior to the lien on and pledge of the Net Revenues securing the payment of the currently outstanding Commercial Paper Obligations and Inferior Lien Obligations referred to herein as the Flex Rate Notes. The City has reserved the right to grant equal and ratable liens on and pledges of Net Revenues to secure payment of Additional Junior Lien Obligations hereafter issued in accordance with the Ordinance. See "DEBT SERVICE REQUIREMENTS" and "THE BONDS – BOND PROVISIONS - Additional Bonds" herein, and "APPENDIX D – CERTAIN PROVISIONS OF THE ORDINANCE".

On November 4, 2010, the City issued its $300,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, TAXABLE SERIES 2010A (DIRECT SUBSIDY – BUILD AMERICA BONDS) and its $200,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE REFUNDING BONDS, TAXABLE SERIES 2010B (DIRECT SUBSIDY – BUILD AMERICA BONDS) as obligations secured by and payable from a junior lien on and pledge of the net revenues of the Systems on parity with Junior Lien Obligations (including the Bonds) and any Additional Junior Lien Obligations hereafter issued. This Remarketing Memorandum, however, describes only the Bonds and not these other series of bonds. Investors interested in purchasing these other bonds should review the Official Statement of the City relating thereto.

For a description of the sources of payment of the purchase price of Bonds tendered for purchase, see "THE BONDS – PURCHASE OF BONDS - Limitations on Payment of Purchase Price" herein.

Perfection of Security for the Bonds

Chapter 1208, as amended, Texas Government Code, applies to the issuance of the Bonds and the pledge of the Net Revenues made to secure the Bonds, and such pledge is therefore valid, effective and perfected. Should State law be amended while the Bonds are outstanding and unpaid, the result of such amendment being that the pledge of the Net Revenues is to be subject to the filing requirements of Chapter 9, Texas Business and Commerce Code, in order to preserve to the registered owners of the Bonds a security interest in such pledge, the City agrees to take such measures as it determines are reasonable and necessary to enable a filing of a security interest in said pledge to occur.

13 Flow of Funds

The Ordinance provides that the gross revenues of the Systems are to be deposited in CPS Energy's General Account, and further provides that such revenues are pledged and appropriated, in the following priority, (i) to the payment of reasonable and proper Maintenance and Operating Expenses of the Systems; (ii) to the payment of Senior Lien Obligations or Additional Senior Lien Obligations, including the establishment and maintenance of the reserve therefor; (iii) to the payment of the Bonds, the currently outstanding Junior Lien Obligations, the City's obligation under the Liquidity Facility, and any Additional Junior Lien Obligations, including the establishment and maintenance of a reserve therefor, if any; (iv) to the payment and security of the Notes and the Agreement (as defined in the ordinance authorizing the Notes); (v) to the payment and security of obligations hereinafter issued which are inferior in lien to the Senior Lien Obligations, Additional Senior Lien Obligations, the Bonds, the currently outstanding Junior Lien Obligations, Additional Junior Lien Obligations, Liquidity Facility obligations, and Commercial Paper Obligations referred to in the Ordinance as Inferior Lien Obligations and which includes the Flex Rate Notes; (vi) to the payment of an annual amount equal to six percent (6%) of the gross revenues of the Systems to be deposited in the Repair and Replacement Account provided for in the Ordinance; (vii) to the payment of the annual amount due the General Fund of the City, as provided in the Ordinance; and (viii) to the extent of any remaining Net Revenues of the Systems in the General Account, to the Repair and Replacement Account to the extent provided in the Ordinance. Any remaining Net Revenues after making or providing for the foregoing payments and deposits may be used for any other purpose of the Board.

Rate Covenant

The City has covenanted in the Ordinance that it will at all times maintain rates and charges for the sale of electric energy, gas, or other services furnished, provided and supplied by the Systems to the City and all other consumers which will be reasonable and nondiscriminatory and which will be reasonably expected to produce gross revenues sufficient to pay all expenses of maintenance and operation of the Systems, and to produce Net Revenues sufficient, together with other lawfully available funds, to pay debt service requirements on all revenue debt of the Systems, including the Senior Lien Obligations, any Additional Senior Lien Obligations, the Bonds, the Junior Lien Obligations, the Liquidity Facility obligations, any Additional Junior Lien Obligations, the Commercial Paper Obligations, and any Inferior Lien Obligation outstanding from time to time. The CPS Energy rate covenant is consistent with and supported by the relevant State statute concerning rate setting for municipally owned utilities ("Municipal Utilities") such as CPS Energy. Section 1502.057, as amended, Texas Government Code, provides that the charges for services provided by encumbered municipal systems, such as CPS Energy, must be "at least sufficient to pay: all operating, maintenance, depreciation, replacement, improvement and interest charges in connection with the utility system; for an interest and sinking fund sufficient to pay any public securities issued or obligations incurred for any purpose…relating to the utility system; and any outstanding debt against the system". This statute could be amended or repealed by the Texas Legislature. See "APPENDIX D – CERTAIN PROVISIONS OF THE ORDINANCE". Also, see "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – Retail Service Rates" and "– Transmission Access and Rate Regulation" regarding rate regulation herein.

Additional Bonds

The City may issue Additional Senior Lien Obligations on a parity with the currently outstanding Senior Lien Obligations if, among other things, it has obtained a certificate from an independent certified public accountant to the effect that the Net Revenues of the Systems during the previous fiscal year, or any 12 consecutive months out of the 15 months immediately preceding the month in which the ordinance authorizing the Additional Senior Lien Obligations is passed, were (i) at least 1.50 times the maximum annual debt service requirements in any future fiscal year on all outstanding Senior Lien Obligations and the proposed Additional Senior Lien Obligations and (ii) at least 1.00 times the maximum annual debt service requirements for any future fiscal year for Senior Lien Obligations, Additional Senior Lien Obligations, and Junior Lien Obligations (including the outstanding Junior Lien Obligations, the Bonds, the Liquidity Facility obligations and any Additional Junior Lien Obligations) to be outstanding, assuming that variable rate interest accrues at The Bond Buyer's Revenue Bond Index with respect to the Junior Lien Obligations and adding or subtracting net payments due on or receivable under interest rate hedge agreements, if any.

The City may issue Additional Junior Lien Obligations if the Board's President and Chief Executive Officer ("CEO") or Chief Financial Officer ("CFO") certifies that the Net Revenues of the Systems during the previous fiscal year, or any 12 consecutive months out of the 18 months immediately preceding the month in which the ordinance authorizing such obligations is passed, were at least 1.00 times the average annual debt service requirements for any future fiscal year for Senior Lien Obligations, Additional Senior Lien Obligations, the Bonds, the other Junior Lien Obligations, and Additional Junior Lien Obligations to be outstanding, assuming that variable rate interest accrues at The Bond Buyer's 14 Revenue Bond Index and adding or subtracting net payments due on or receivable under interest rate hedge agreements, if any.

The refundable tax credits to be received by the City in connection with any obligations secured by Net Revenues of the System that are designated as obligations entitling to the City to the receipt of refundable tax credits from the United States Department of the Treasury under the Code, will be considered as an offset to debt service for the purpose of satisfying any debt service coverage requirements serving as a prerequisite to the issuance of additional indebtedness at any lien level.

Amendments

The City may, without the consent of or notice to any Holders, from time to time and at any time, amend the Ordinance in any manner not detrimental to the interest of the Holders, including the curing of any ambiguity, inconsistency, or formal defect or omission therein. In addition, the City may, with the written consent of Holders holding a majority in aggregate principal amount of the Bonds then Outstanding affected thereby, amend, add to, or rescind any of the provisions of the Ordinance; provided that, without the consent of all Holders of Outstanding Bonds, no such amendment, addition, or rescission shall (1) extend the time or times of payment of the principal of and interest on the Bonds, reduce the principal amount thereof, the rate of interest thereon, or the redemption price therefor, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required for consent to any such amendment, addition, or rescission.

Defeasance

The Ordinance provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on the Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise) is provided by irrevocably depositing with a paying agent in trust (i) money in an amount sufficient to make such payment and/or (ii) Government Securities certified by an independent accounting firm or other legally permitted person to mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the Bonds. The Ordinance provides that "Government Securities" means (i) direct, non-callable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (ii) non-callable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent, and (iii) non- callable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than "AAA" or its equivalent.

Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking arrangements have been made, the City shall have no further rights to amend the Ordinance or call Bonds for redemption; provided however, the City has reserved the option, to be exercised at the time of the defeasance of the Bonds, to call for redemption at an earlier date those Bonds which have been defeased to their maturity date, if the City (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption, (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements, and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes.

Registered Owners' Remedies

If the City defaults in the payment of principal, interest, or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Ordinance, or defaults in the observation or performance of any other covenants, conditions, or obligations set for in the Ordinance, the registered owners may seek a writ of mandamus to compel City officials to carry out their legally imposed duties with respect to the Bonds, if there is no other available remedy at law to compel performance of the Bonds or Ordinance and the City's obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, so rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. The Ordinance does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the City to perform in accordance with the 15 terms of the Ordinance, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. On June 30, 2006, the Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W.3d 325 (Tex. 2006) that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in "clear and unambiguous" language. Chapter 1371, as amended, Texas Government Code ("Chapter 1371"), which pertains to the issuance of public securities by issuers such as the City, permits the City to waive sovereign immunity in the proceedings authorizing the issuance of the Bonds. Notwithstanding its reliance upon the provisions of Chapter 1371 in connection with its issuance of the Bonds (as further described in "BOND PROVISIONS – Authority and Security for the Bonds"), the City has not waived the defense of sovereign immunity with respect thereto. Because it is unclear whether the Texas legislature has effectively waived the City's sovereign immunity from a suit for money damages outside of Chapter 1371, bondholders may not be able to bring such a suit against the City for breach of the Bonds or the Ordinance covenants. Even if a judgment against the City could be obtained, it could not be enforced by direct levy and execution against the City's property. Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the United States. Bankruptcy Code ("Chapter 9"). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues (such as the Net Revenues), such provision is subject to judicial construction. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The original opinion of Co-Bond Counsel noted and the remarketing opinion of Bond Counsel will note that all opinions relative to the enforceability of the Ordinance and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors and general principles of equity that permit the exercise of judicial discretion.

Book-Entry-Only System

This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by DTC while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Remarketing Memorandum. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof.

The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Remarketing Memorandum. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC.

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered certificate will be issued for the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC.

DTC, the world's largest depository, is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC provides custody and asset servicing for about 3.5 million issues of United States and non-United States equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC's participants ("Direct Participants") deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants' accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both United States and non-United States securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly owned subsidiary of The Depository Trust & Clearing Corporation ("DTCC"). DTCC is the holding company for DTC, National Securities Clearing Corporation, and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both United States. and non-United States. securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial 16 relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). DTC has Standard & Poor's highest rating: "AAA". The DTC Rules applicable to its participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC's records. The ownership interest of each beneficial owner of the Bonds is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial owners will not receive written confirmation from DTC of their purchase. Beneficial owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the beneficial owner entered into the transaction. Transfers of ownership interest in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of beneficial owners. Beneficial owners will not receive certificates representing their ownership interests in the Bonds, except in the event that use of the book- entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual beneficial owners of the Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the beneficial owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial owners of the Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, beneficial owners of the Bonds may wish to ascertain that the nominee holding Bonds for their benefit has agreed to obtain and transmit notices to beneficial owners. In the alternative, beneficial owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar, on the payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to beneficial owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of DTC (nor its nominee), the Paying Agent/Registrar or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the beneficial owners shall be the responsibility of Direct and Indirect Participants.

A beneficial owner shall give notice to elect to have its Bonds purchased or tendered, through its Participant, to the Paying Agent/Registrar, and shall effect delivery of such Bonds by causing the Direct Participant to transfer the Participant's interest in the Bonds, on DTC's records, to the Paying Agent/Registrar. The requirement for physical delivery of the Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Bonds are transferred by Direct Participants on DTC's records and followed by a book entry credit of tendered Bonds to the Paying Agent/Registrar's DTC account.

17 DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the City and the Paying Agent/Registrar acting as Tender Agent. Under such circumstances, in the event that a successor depository is not obtained, the Bonds are required to be printed and delivered.

The City may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, the Bonds will be printed and delivered.

The information in this section concerning DTC and DTC's book-entry system has been obtained from sources that the City believes to be reliable, but the City takes no responsibility for the accuracy thereof.

So long as Cede & Co. is the registered owner of the Bonds, the City will have no obligation or responsibility to the DTC Participants or Indirect Participants, or the persons for which they act as nominees, with respect to payment to or providing of notice to such Participants, or the persons for which they act as nominees.

Use of Certain Terms in Other Sections of this Remarketing Memorandum

In reading this Remarketing Memorandum it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Remarketing Memorandum to registered owners should be read to include the person for which the Direct or Indirect Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinance will be given only to DTC.

STANDBY BOND PURCHASE AGREEMENT

Purchase Commitment

In connection with the issuance of the Bonds, the City entered into a Standby Bond Purchase Agreement, as amended, with the Bank. Under the Standby Bond Purchase Agreement, the Bank agrees, for the term and on the conditions described therein, to purchase on the required purchase date, at the purchase price described herein, all Bonds then tendered for purchase pursuant to the provisions described herein under "THE BONDS – PURCHASE OF BONDS" to the extent that proceeds of the remarketing of such Bonds pursuant to the Remarketing Agreement have not been timely received by the Paying Agent/Registrar for such purpose. The Standby Bond Purchase Agreement extends to December 6, 2012, unless sooner terminated or replaced as described herein or extended by agreement of the City and the Bank.

The Bank is not obligated to pay the principal or redemption price of or interest on the Bonds under any circumstances, but is obligated only to purchase tendered Bonds on and subject to the terms, provisions, and conditions of the Standby Bond Purchase Agreement.

The Bank's commitment to purchase tendered Bonds under the Standby Bond Purchase Agreement on any day is limited to a principal amount of Bonds equal to the initial aggregate principal amount of the Bonds, less the amount of Bonds previously redeemed or purchased by the Bank pursuant to the Standby Bond Purchase Agreement, plus the amount of Bank Bonds remarketed by the Remarketing Agent. The aggregate purchase price of Bonds committed to be purchased by the Bank may not exceed the principal amount of the Bonds plus six months interest thereon at 7% per annum or, with the prior written consent of the Bank, plus 270 days' interest thereon at 10% per annum upon conversion of the Bonds to the Commercial Paper Mode.

The Bank is not obligated to purchase tendered Bonds under the Standby Bond Purchase Agreement (a) if an event has occurred that would permit it to terminate its obligation to purchase as described below or (b) unless it receives proper demand from the Paying Agent/Registrar in accordance with the Standby Bond Purchase Agreement. The Paying Agent/Registrar has agreed to make such demand as required.

Termination or Suspension of Commitment

The Bank's commitment to purchase tendered Bonds pursuant to the Standby Bond Purchase Agreement will terminate immediately, with no prior notice to the Paying Agent/Registrar or any owner of Bonds, and thereafter the Bank will not be obligated to purchase tendered Bonds thereunder, if (a) any scheduled principal or interest due on the Bonds is not paid by the City when due, (b) the City commits specified acts relating to bankruptcy or insolvency or is subject to 18 specified involuntary insolvency actions (or to attachment or similar process against substantial assets) for 60 days or authorizes or consents to any such action or admits its inability to pay its debts, (c) the City defaults in payment of any debt of the Systems, or (d) any material provision of the Standby Bond Purchase Agreement or Ordinance is no longer legally binding on the City or is contested or denied by the City (or other governmental authority with jurisdiction without City protest), or the pledge of Net Revenues made under the Ordinance ceases to be enforceable or to enjoy its stated priority.

The Bank may give notice to the City, the Paying Agent/Registrar and the Remarketing Agent requesting a mandatory tender of the Bonds as described herein under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender" if (a) any "event of default" under the Standby Bond Purchase Agreement or related agreements continues beyond any applicable grace period, (b) a $10 million or greater judgment is rendered against the City and not satisfied, stayed, or bonded within 60 days, (c) quarterly commitment fees payable by the City under the Standby Bond Purchase Agreement remain past due for 60 days after notice, (d) the City fails to observe or perform any covenant under the Standby Bond Purchase Agreement for more than 60 days after notice, (e) any representation of the City in the Standby Bond Purchase Agreement or any financial statements or other documents delivered to the Bank under the Standby Bond Purchase Agreement are materially incorrect, (f) any of the rating agencies that have rated the Bonds assigns a rating to the Senior Lien Obligations below "A3" or "A-" or withdraws its assigned rating, or (g) any obligation of the City is declared payable as a result of the City's failure to perform an agreement or condition. The Bank's commitment to purchase tendered Bonds will terminate on the 45th day after the Paying Agent/Registrar's receipt of such notice. See "THE BONDS – PURCHASE OF BONDS – Mandatory Tender - Termination of Liquidity Facility or Credit Facility."

The Bank's commitment to purchase Bonds under the Standby Bond Purchase Agreement will expire on December 6, 2012, unless extended by agreement of the Bank and the City.

Release and Substitution

The Standby Bond Purchase Agreement or any substitute Liquidity Facility may be replaced by an alternate Liquidity Facility at the request of the City on conditions described in the Ordinance. The Standby Bond Purchase Agreement may not be amended without the written consent of the Bank. While Bonds are in the Term Mode, the Liquidity Facility may be released in connection with a substitution only on the first Business Day of an interest rate period for such Bonds. As a precondition to any substitution of the Liquidity Facility, Bonds must be purchased as described under "THE BONDS – PURCHASE OF BONDS - Mandatory Tender". The Paying Agent/Registrar must give DTC (and any beneficial owner that registers with the Paying Agent/Registrar to receive notices) at least 30 days advance notice of such mandatory purchase and prompt notice of an extension of the Liquidity Facility. See "CONTINUING DISCLOSURE OF INFORMATION" herein.

The Bank

For certain information with respect to the Bank, see "APPENDIX F – THE LIQUIDITY BANK".

REMARKETING AGREEMENT

Pursuant to the terms of a remarketing agreement and a third supplemental remarketing agreement (collectively, "Remarketing Agreement"), the City has appointed Morgan Stanley & Co. Incorporated as Remarketing Agent for the Bonds. The Remarketing Agent is obligated to use its best efforts to remarket Bonds whenever they are tendered for purchase, subject to certain conditions, in consideration of the payment of a remarketing fee by the City. The Remarketing Agent has also agreed to perform the functions of rate-setting agent for the Bonds by determining the interest rates on, and interest periods for, the Bonds in the manner and for the times specified in the Ordinance.

In the Remarketing Agreement, the City has agreed to indemnify the Remarketing Agent, to the extent permitted by applicable law, against certain losses and liabilities, including liabilities that may arise under Federal or state securities laws. The Remarketing Agent may resign or be removed at any time and discharged of its duties upon the direction of the City, upon at least 30 days' prior written notice. In such an event the City has agreed to promptly cause the Paying Agent/Registrar to give notice to Bondholders and the rating agencies that assigned ratings to the Bonds of any such removal or resignation. Any successor Remarketing Agent must meet the qualifications set forth in the Ordinance.

19 DEBT SERVICE REQUIREMENTS

The following schedule reflects annual principal and interest requirements on all outstanding Senior Lien Obligations and Junior Lien Obligations, including the annual debt service requirements on the Bonds. Debt service incurred on obligations issued from time to time under the Commercial Paper Program and the Flexible Rate Revolving Note Private Placement Program, respectively, is excluded. See "JUNIOR LIEN OBLIGATIONS", "COMMERCIAL PAPER PROGRAM", and "FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT PROGRAM" herein.

Outstanding Senior Lien Obligations and Junior Lien Obligations

Junior Lien Obligations Junior Lien Series 2010A Bonds Series 2010B Bonds Total Senior and Year Ending Total Senior Lien Obligations Debt Debt Junior Lien February 1, Obligations 1 Outstanding 2,3 Service4 Service4 Obligations 4,5,6 2011$ 357,053,617 $ 14,742,132 $ 2,737,020 $ 1,981,763 $ 376,514,532 2012 363,533,974 11,697,573 11,325,600 8,200,400 394,757,546 2013 351,137,304 11,697,573 11,325,600 8,200,400 382,360,876 2014 354,532,123 15,904,600 11,325,600 8,200,400 389,962,723 2015 318,240,023 15,904,600 11,325,600 8,200,400 353,670,623 2016 310,847,898 15,904,600 11,325,600 8,200,400 346,278,498 2017 314,093,554 15,904,600 11,325,600 8,200,400 349,524,154 2018 300,659,310 15,904,600 11,325,600 8,200,400 336,089,910 2019 308,658,360 15,904,600 11,325,600 8,200,400 344,088,960 2020 308,652,930 15,904,600 11,325,600 8,200,400 344,083,530 2021 303,776,345 15,904,600 11,325,600 8,200,400 339,206,945 2022 312,781,233 15,904,600 11,325,600 8,200,400 348,211,833 2023 312,780,023 15,904,600 11,325,600 8,200,400 348,210,623 2024 312,779,960 15,904,600 11,325,600 8,200,400 348,210,560 2025 309,783,810 53,904,600 11,325,600 8,200,400 383,214,410 2026 113,980,610 52,384,600 11,325,600 8,200,400 185,891,210 2027 113,977,810 50,864,600 11,325,600 8,200,400 184,368,410 2028 113,974,272 44,959,600 11,325,600 8,200,400 178,459,872 2029 113,977,460 60,000,000 11,325,600 8,200,400 193,503,460 2030 113,981,772 58,000,000 11,325,600 8,200,400 191,507,772 2031 113,973,772 56,000,000 11,325,600 8,200,400 189,499,772 2032 112,896,348 54,000,000 11,325,600 8,200,400 186,422,348 2033 120,990,898 52,000,000 11,325,600 8,200,400 192,516,898 2034 119,163,004 - 11,325,600 58,245,400 188,734,004 2035 122,511,827 - 11,325,600 54,898,455 188,735,882 2036 123,271,827 - 11,325,600 54,134,607 188,732,034 2037 124,085,462 - 11,325,600 53,320,122 188,731,184 2038 124,934,980 - 63,800,600 - 188,735,580 2039 125,837,978 - 62,894,564 - 188,732,542 2040 53,393,042 - 103,007,944 - 156,400,986 2041 54,403,912 - 102,000,644 - 156,404,556 Totals$ 6,604,665,438 $ 695,201,278 $ 628,906,372 $ 402,989,147 $ 8,331,762,235

(1) Excludes regularly scheduled interest due on the Taxable New Series 2009C Bonds and the Taxable New Series 2010A Bonds anticipated to be off-set by the refundable tax credit to be received from the Treasury as a result of such obligations being designated as "build America bonds" and "qualified bonds" under t he Code. (2) Assumes redemption in accordance with mandatory sinking fund requirements, but no redemption of the 2003 Junior Lien Obligations by the liquidity bank. If the 2003 Junior Lien Obligations purchased by the liquidity bank are not remarketed by the end of the bank’s commitment period, they must be redeemed in ten semiannual installments. Also assumes interest rate expense at 4% per annum. Actual interest rates are set weekly, as long as the 2003 Junior Lien Obligations remain in a weekly rate mode, and will differ. (3) Assumes redemption in accordance with mandatory sinking fund requirements, but no redemption of the Bonds purchased by the liquidity bank. If the Bonds purchased by the liquidity bank are not remarketed by the end of the bank’s commitment period, they must be redeemed in eight semiannual installments. Interest on the Bonds is calculated at the current three-year term expiring November 30, 2010, at 3.625%, and at 1.15%, which is the interest rate for the next two-year Term Rate commencingon December 1, 2010 and extending to November 30, 2012, and at 4% per annum thereafter for purposes of illustration. Actual interest rates will be variable after the current interest rate period and will differ. (4) Excludes regularly scheduled interest due on these obligations anticipated to be off-set by the refundable tax credit to be received from the Treasury as a result of such obligations being designated as "build America bonds" under the Code. (5) Senior Lien Obligations outstanding and Junior Lien Obligations outstanding represent the debt service requirements for the total outstanding debt payable from and secured by the Net Revenues of the Systems, excluding debt service in respect of the Commercial Paper Program and the Flexible Rate Revolving Note Placement Program. See "COMMERCIAL PAPER PROGRAM" and "FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT PROGRAM". (6) If the 2003 Junior Lien Obligations and the 2004 Junior Lien Obligations were to bear interest at the rate of 10% per annum (which is the maximum interest rate unless the supporting liquidity facilities are amended), maximum total annual debt service requirements would increase from $398,411,018 to $411,495,874, in the fiscal year ending January 31, 2012.

20 Historical Net Revenues and Coverage

(Dollars in thousands) Fiscal Years Ended January 31, 2006 2007 2008 2009 2010 20101 Gross Revenues2 …………………………$ 1,754,927 $ 1,822,230 $ 1,943,313 $ 2,191,323 $ 1,981,103 $ 2,052,344 Maintenance & Operating Expenses … 1,057,035 1,104,0373 1,177,337 1,408,3533 1,205,189 1,218,909

Available For Debt Service …………… $ 697,892 $ 718,193 $ 765,976 $ 782,970 $ 775,914 $ 833,435 Actual Principal and Interest Requirements: Senior Lien Obligations4…………………$ 256,442 $ 271,931 $ 290,954 $ 309,855 $ 332,5405 $ 347,9165 55 Junior Lien Obligations …………………$ 10,964 $ 15,006 $ 15,179 $ 11,190 $ 6,987 $ 6,742

ACTUAL COVERAGE - Senior Lien6 … 2.72x 2.64x 2.63x 2.53x 2.33x 2.40x ACTUAL COVERAGE - Senior and Junior Liens ……………… 2.61x 2.50x 2.50x 2.44x 2.29x 2.35x

PRO FORMA MADS COVERAGE Senior Lien7 …………………………… 1.92x 1.98x 2.11x 2.15x 2.13x 2.29x Senior and Junior Liens8 ……………… 1.77x 1.82x 1.94x 1.98x 1.97x 2.11x

(1) Twelve monthsendedJuly31,2010. (2) Calculatedin accordancewith theBondOrdinances. (3) Certain amounts in prioryears havebeenreclassifiedto conformto the current-year presentation. (4) Net of accrued interest whereapplicable. (5) Represents interest owed after taking into account as an offset thereto therefundable tax credits relating to certain obligations as a result of their designation as "build America bonds" and "qualified bonds" under theCode. (6) Calculation differs from"FIVE-YEAR STATEMENTOF NET REVENUES AND DEBT SERVICE COVERAGE" herein, by the inclusion ofnonoperatingexpensesin the aboveschedule. (7) Maximum annual debt service on SeniorLien Obligations. (8) Maximum annual debt service on SeniorLien Obligations and the Junior Lien Obligations (including these Bonds)is based upon the footnoted assumptionsunder"OutstandingSeniorLienObligationsand JuniorLienObligations"footnote3, onthe previouspage.

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21 JUNIOR LIEN OBLIGATIONS

On May 15, 2003, the City issued $250,000,000 of Junior Lien Obligations (the "2003 Junior Lien Obligations") to fund certain capital infrastructure improvements to the Systems and costs of issuance. The 2003 Junior Lien Obligations currently carry an adjustable rate of interest that resets weekly. The final maturity date on any remaining outstanding principal of and interest on the Junior Lien Obligations issued in May 2003 is February 1, 2033. Effective May 19, 2010, Jefferies & Company, Inc. assumed the role of Remarketing Agent for the 2003 Junior Lien Obligations.

On November 18, 2004, the City issued the Bonds in a principal amount of $160,000,000 to acquire an additional 300 megawatts of electric generating capacity in the South Texas Project ("STP"). See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - South Texas Project" herein. In addition, the Bonds were issued to make other improvements to the Systems and to pay for costs of issuance. On December 1, 2007, the Bonds were remarketed in the principal amount of $152,000,000 in a three-year Term Mode, with a three-year interest rate period and a mandatory tender date of December 1, 2010. On December 1, 2010, the Bonds will be remarketed in a Term Mode with a two-year interest rate period expiring November 30, 2012. As a result, these Bonds are subject to mandatory tender on December 3, 2012, being the first business day succeeding the expiration of this Term Rate period. The Bonds have a final maturity date of December 1, 2027. While bearing interest in a Term Mode, the interest on the 2004 Junior Lien Obligations is payable semi-annually on June 1 and December 1 commencing June 1, 2011 in the newly remarketed interest rate period. Morgan Stanley & Co. Incorporated, pursuant to the terms of a remarketing agreement dated November 1, 2004 and a third supplemental remarketing agreement, has been appointed as the remarketing agent for the Bonds. On May 11, 2010, $4,385,000 of the Bonds were defeased, using lawfully available funds and proceeds from an issuance of Flex Rate Notes (hereinafter defined), to a redemption date of December 1, 2010, bringing the existing total outstanding and to be remarketed to $147,615,000.

The mode for Variable Rate Junior Lien Obligations or any portion thereof may be converted to a different mode, or to an auction rate or term rate with an interest rate period of different duration, at the direction of the City. Following such a conversion, the Variable Rate Junior Lien Obligations or portion thereof, will bear interest at the corresponding daily rate, weekly rate, auction rate, commercial paper rate, term rate, or fixed rate. In connection with the issuance of the Bonds and the 2003 Junior Lien Obligations, the City enhanced the liquidity of the Bonds and the 2003 Junior Lien Obligations by providing for the purchase of the Bonds and the 2003 Junior Lien Obligations that are not remarketed by the remarketing agents through two separate Standby Bond Purchase Agreements, with two different banks. These banks, with respect to the series of the Bonds and the 2003 Junior Lien Obligations each bank is enhancing, are not obligated to pay the principal or redemption price of or interest on the Bonds and the 2003 Junior Lien Obligations under any circumstances, but are obligated only to purchase tendered Junior Lien Obligations on and subject to the terms, provisions, and conditions of each bank's respective Standby Bond Purchase Agreement.

On November 4, 2010, the City issued its $300,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, TAXABLE SERIES 2010A (DIRECT SUBSIDY – BUILD AMERICA BONDS) and its $200,000,000 ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE REFUNDING BONDS, TAXABLE SERIES 2010B (DIRECT SUBSIDY – BUILD AMERICA BONDS) as Additional Junior Lien Obligations secured by and payable from a junior lien on and pledge of the net revenues of the Systems on parity with the outstanding Junior Lien Obligations (including the Bonds) and any Additional Junior Lien Obligations hereafter issued. Upon issuance of these series of Additional Junior Lien Obligations, the aggregate amount of Junior Lien Obligations outstanding (after taking into account the remarketing of the Bonds) equaled $897,615,000.

The borrowings from the Junior Lien Obligations are equally and ratably secured by and are payable from the Net Revenues of the Systems, such pledge being subordinate and inferior to the pledge of Net Revenues securing the Senior Lien Obligations, but prior and superior to the lien on and pledge of the Net Revenues securing the payment of the Commercial Paper Obligations or any notes to be issued pursuant to the Flexible Rate Revolving Note Private Placement Program. The obligations of the City under the two Standby Bond Purchase Agreements are secured on a parity basis with the pledge of the Net Revenues that secures the Junior Lien Obligations. See "RESPONSE TO COMPETITION – Debt and Asset Management Program" and "CONSTRUCTION PROGRAM" herein.

COMMERCIAL PAPER PROGRAM

Pursuant to authorization from the City, CPS Energy maintains a Commercial Paper Program to provide tax-exempt financing for various purposes. The Commercial Paper Program, which has been amended numerous times since its inception, and which was most recently amended and restated on June 26, 1997, currently is authorized to have Notes outstanding thereunder in an aggregate principal amount not to exceed $450,000,000. A revolving credit agreement, as amended, with a consortium of banks ("Credit Agreement") permits CPS Energy to borrow up to an aggregate amount not 22 to exceed $450,000,000 in immediately available funds on a revolving basis, until November 1, 2012, with one-year extensions by mutual agreement of the City, the administrative agent and the lenders, to pay the principal of maturing Notes. As of the date of this Remarketing Memorandum, $130,000,000 in aggregate principal amount of Notes was outstanding.

The purpose of the Commercial Paper Program is to: (i) assist in the financing of capital improvements to the Systems; (ii) provide working capital and funds for fuel acquisition; (iii) pay interest on resold Notes; (iv) refund outstanding Notes on maturity; and (v) redeem other obligations of the Systems which are secured by and payable from a lien on and/or a pledge of Net Revenues of the Systems. Scheduled maturities of the Notes may not extend past November 1, 2028 (the maturity date specified in the ordinance authorizing the Commercial Paper Program). See "RESPONSE TO COMPETITION – Debt and Asset Management Program" and "CONSTRUCTION PROGRAM" herein.

The borrowings under the Commercial Paper Program, including the Notes, are equally and ratably secured by and are payable from (i) the Net Revenues of the Systems, such pledge being subordinate and inferior to the pledge of Net Revenues securing the Senior Lien Obligations and the currently outstanding Junior Lien Obligations (including the Bonds); (ii) the proceeds from the sale of additional bonds issued for that purpose or borrowings under the Commercial Paper Program; and (iii) borrowings under and pursuant to the Credit Agreement. The obligations of the City under the Credit Agreement are secured on a parity basis with the pledge of the Net Revenues that secures the Notes and constitute the Commercial Paper Obligations.

FLEXIBLE RATE REVOLVING NOTE PRIVATE PLACEMENT PROGRAM

The City has established a flexible rate revolving note program ("Flexible Rate Revolving Note Private Placement Program") for the benefit of the Systems, under which the City may issue taxable or tax exempt notes, bearing interest at fixed or variable rates and having individual maturities of one year or less, in an aggregate principal amount at any one time outstanding not to exceed $100,000,000 (the "Flex Rate Notes"). This program became effective on April 28, 2009, and now provides additional liquidity in support of the Systems. This program authorizes the issuance of such notes through November 1, 2028. These notes will be secured by an inferior lien pledge of Net Revenues (to be classified as Inferior Lien Obligations pursuant to the Bond Ordinances), funds, deposits, or investments of the Board legally available for such purpose, or any combination of the foregoing, and will be sold, by private placement, to provider banks (anticipated to be the Board's depository bank) under note purchase agreements entered into by the City from time to time. JPMorgan Chase Bank, N.A. currently serves as the note purchaser under this program by contractual arrangement in effect through December 31, 2010. CPS Energy is in negotiations with JPMorgan Chase Bank, N.A. to extend the note purchase agreement to December 31, 2011 and expects to conclude these negotiations prior to the date of termination.

On May 10, 2010, CPS Energy issued $25,200,000 of Flex Rate Notes, the interest on which is not excluded for purposes of federal income taxation, under this program and used the proceeds on May 11, 2010, along with other lawfully- available funds, to effectuate the defeasance of $25,745,000 of outstanding Senior Lien Obligations and Junior Lien Obligations, the interest on which is excluded for purposes of federal income taxation. This action became necessary upon the transfer of tax exempt bond-financed facilities as a part of its settlement of litigation relating to STP Units 3 and 4. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System – Nuclear Cost Issue and CPS Energy Internal Investigation" herein. There are $25,200,000 of outstanding Flex Rate Notes under the Flexible Rate Revolving Note Private Placement Program as of the date of this Remarketing Memorandum.

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23 SAN ANTONIO ELECTRIC AND GAS SYSTEMS

History and Management

The City acquired its electric and gas utilities in 1942 from the American Light and Traction Company, which had been ordered by the federal government to sell properties under provisions of the Holding Company Act of 1935. The bond ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations, Junior Lien Obligations, Commercial Paper Notes and Inferior Lien Obligations establish management requirements and provide that the complete management and control of the Systems is vested in the Board. The Mayor of the City is a voting member of the Board, represents the City Council, and is charged with the duty and responsibility of keeping the City Council fully advised and informed at all times of any actions, deliberations, and decisions of the Board and its conduct of the management of the Systems. The present members of the Board are: Originally Present Name Profession Appointed to the Board Term Expires1

Charles E. Foster, AT&T, Retired January 14, 2010 January 31, 2012 Chairman Prodigy Internet, Retired

Derrick Howard, Executive Director, February 1, 2008 January 31, 2013 Vice Chairman Freeman Coliseum

Stephen S. Hennigan, Executive Vice President, June 1, 2001 January 31, 2011 Trustee San Antonio Federal Credit Union

Homer Guevara, Jr., Professor, Academic Chair - Business March 19, 2009 January 31, 2014 Trustee & Government, Northwest Vista College

Julián Castro, Mayor, June 1, 2009 May 31, 2011 Ex-Officio Member City of San Antonio

(1) Stephen S. Hennigan is currently serving his second term. The Board solicited applicants to fill this upcoming vacancy and received 44 responses, which are currently being reviewed with an anticipated date of selection of Mr. Hennigan's replacement to occur in January 2011. Derrick Howard and Homer Guevara, Jr. are serving their first terms. Julián Castro assumed his Board position upon becoming Mayor on June 1, 2009. Charles E. Foster was selected to serve for Aurora Geis's remaining term. See "DESCRIPTION OF PHYSICAL PROPERTY –Electric System -Nuclear Cost Issue and CPS Energy Internal Investigation" herein for a discussion of recent developments affecting the Board and its members.

Vacancies in membership on the Board are filled by majority vote of the remaining members. New Board appointees must be approved by a majority vote of the City Council. A vacancy in certain cases may be filled by authorization from the City Council. The members of the Board are eligible for re-appointment by other Board members at the expiration of their first five-year term of office to one additional term. Reappointments require approval by the City Council. In 1997, the City Council ordained that Board membership should be representative of the geographic quadrants established by the City Council. New Board members considered for approval by the City Council will be those whose residence is in a quadrant that provides such geographic representation.

The Board is vested with all of the powers of the City with respect to the management and operation of the Systems and the expenditure and application of the revenues therefrom, including all powers necessary or appropriate for the performance of all covenants, undertakings, and agreements of the City contained in the bond ordinances, except regarding rates, condemnation proceedings, and issuance of bonds, notes, or commercial paper. The Board has full power and authority to make rules and regulations governing the furnishing of electric and gas service and full authority with reference to making extensions, improvements and additions to the Systems, and to adopt rules for the orderly handling of CPS Energy's affairs. It is empowered to appoint and employ all officers and employees and must obtain and keep in force a "blanket" type employees' fidelity and indemnity bond covering losses in the amount of not less than $100,000.

The management provisions of the bond ordinances also grant the City Council authority to review Board action with respect to policies adopted relating to research, development, and planning.

Citizens Advisory Committee

In 1997, CPS Energy established a 15-member Citizens Advisory Committee ("CAC") to enhance its relationship with the community and to address the City Council's goals regarding broader community involvement with CPS Energy. The CAC meets monthly and the primary goal of the CAC is to provide recommendations from the community on the operations of CPS Energy for use by the Board and CPS Energy staff. Representing the various sectors of CPS Energy's 24 service area, the CAC encompasses a broad range of customer groups in order to identify their concerns and understand their issues.

City of San Antonio City Council members nominate ten of the 15 members, one representing each district. The other five members are at-large candidates interviewed and nominated by the CPS Energy Citizens Advisory Committee from those submitting applications and resumes. The CPS Energy Board of Trustees appoints all members to the committee. Members can serve up to three two-year terms.

Administration and Operating Personnel

CPS Energy had 3,659 employees as of July 31, 2010. The average tenure of a CPS Energy employee is over 13 years. The vast majority of all executive and supervisory personnel have been schooled and trained in the utility industry. CPS Energy employees have a broad range of benefits, including a defined benefit pension plan, group life insurance, hospitalization, major medical and other benefits. Generally good working conditions have produced a stable, well- qualified, highly motivated work force which, between August 1, 2009 and July 31, 2010, recorded an average turnover rate of 2.77%. There are approximately 1,686 wage scale (hourly) employees in the CPS Energy work force.

CPS Energy links an employee incentive compensation plan to employee participation in controlling expenses, promoting safety, maintaining low utility bills, and enhancing customer satisfaction. The Executive Incentive Plan, established in 1997, provides links between CPS Energy's competitiveness and each executive's compensation. Incentive plans were implemented for the entire salaried work force (including exempt and non-exempt employees) in 1998, and for the entire wage-scale (hourly) workforce in 2003.

CPS Energy continues to enhance its Performance Management system. This system supports a process that develops and emphasizes performance against an established set of workforce attributes (behavioral factors) and engages all employees in actively working toward key performance goals that align to organizational and business unit/area strategies and objectives. The process is designed to provide for continual monitoring and a high level of coaching and feedback to reach performance expectations, to provide meaningful developmental opportunities, to emphasize how results are achieved, and to reward and recognize contributions toward business goals. The traditional employee annual review process and cost-of-living driven pay system have been replaced with an enhanced performance assessment process, market-based salaries, and incentive awards based on CPS Energy's overall performance. In addition, CPS Energy is actively engaged in comprehensive workforce development and succession planning processes to promote wider development opportunity for employees to learn and grow. These processes are based on the foundational ideas that all employees are expected to develop to their maximum capabilities and that succession planning must focus on ensuring that key positions in the organization are always staffed by employees who have the capacity to keep the company operating at its highest level of productivity.

In the fall of 2006, CPS Energy announced plans for a major organizational redesign of CPS Energy's management. This redesign focuses on preparing CPS Energy for the competitive deregulated market that it may be required to enter in the future. By developing an optimal management structure, CPS Energy wants to ensure its continued success either in or out of the competitive deregulated environment. The first phase of the organizational redesign plan began on November 21, 2006, when CPS Energy announced the creation of a senior management "Strategy Development Team". The goal of this management team is to concentrate on corporate strategies for CPS Energy's continued success. Reporting directly to the Strategy Development Team is a management team that focuses on strategy implementation. The "Strategy Implementation and Innovation Team" concentrates on transforming strategic plans into operational processes and actions. Phase one of the redesign was completed with the selection of the members to the Strategy Implementation and Innovation Team on February 7, 2007. Phase two of the organizational redesign focused on the development of CPS Energy's next level management positions and this team is called the "Continuous Quality Improvement Team". This team is responsible for improving efficiencies and effectiveness of processes throughout the organization. The Continuous Quality Improvement Team was established on November 7, 2007. The Organizational Development Division of Corporate Shared Services ("OD") business area continues to monitor CPS Energy's organizational design, reviewing accountabilities of managers in these tiers of the organization.

CPS Energy's principal executives and members of the Strategy Development Team include: Doyle N. Beneby, President & CEO; Paula Gold-Williams, Treasurer, Executive Vice President and Chief Financial Officer; Jelynne LeBlanc-Burley, Executive Vice President of Corporate Support Services & Chief Administrative Officer; John B. Moore, Executive Vice President of Energy Delivery Services; Cristopher C. Eugster, Executive Vice President and Chief Sustainability Officer; Carolyn E. Shellman, Secretary, Executive Vice President and General Counsel; Richard M. Peña, Senior Vice President of Energy Development; Michael K. Kotara, Senior Vice President of Fossil Generation; John Saenz, Jr., Senior Vice President of Retail Energy; Lloyd D. (L.D.) Hollingsworth, Chief Risk Officer; Helen F. Madison, Chief Audit & Ethics 25 Officer; Jim Campbell, Senior Director of Governmental Relations and Communications, and Eduardo J. Belmares, Chief of Staff.

Mr. Beneby joined CPS Energy on August 1, 2010 as President & CEO. A veteran of the electric industry with over 25 years of experience, Mr. Beneby held several leadership positions with Exelon Power and PECO (Philadelphia Electric Company) after joining PECO in 2003. Most recently, he served as President of Exelon Power and Senior Vice President of Exelon Generation where he was responsible for the operations of approximately 8,000 megawatts of natural gas, coal, hydroelectric and solar generation in five states. Mr. Beneby previously held the positions of Senior Vice President, Vice President of Operations and Vice President of Construction and Maintenance with Exelon Power. He has also held positions with Consumers Energy in Michigan and Florida Power & Light. Mr. Beneby earned a Bachelor's degree in engineering from Montana Technical College and a Master of Business Administration degree from the University of Miami.

Ms. Gold-Williams joined CPS Energy in October 2004, and served as Controller & Assistant Treasurer, as well as Vice President & Chief Administrative Officer before being appointed Executive Vice President for Financial Services and Chief Financial Officer. Ms. Gold-Williams is responsible for the major areas of budgeting, finance, accounting, and the financial operations of CPS Energy and also serves as Treasurer of the Board. Prior to joining CPS Energy, she held several senior management positions at other companies, including serving as the Vice President of Finance for a publicly traded food service company from 2000 – 2004 with responsibilities over SEC reporting, debt management, financial planning and budgeting, tax and various accounting functions. From 1998 to 2000, Ms. Gold-Williams initially served as the Controller for the same publicly traded company and directly before that period she served as a Regional Controller for Time Warner Cable from 1990 – 1998. At Time Warner Cable, Ms. Gold-Williams was responsible for all accounting functions and intermittently led other functions including IT, purchasing and front counter customer service. Ms. Gold-Williams is a CPA and also holds a master of business administration degree with a concentration in finance and accounting.

Ms. LeBlanc-Burley joined CPS Energy on April 7, 2008, as Vice President & Chief Administrative Officer for Organizational Excellence & Shared Services after serving local municipal government for 24 years. She was appointed by the Board of Trustees to serve as Acting General Manager on November 30, 2009. Ms. LeBlanc-Burley served in this role through August 1, 2010 when she became Executive Vice President of Corporate Shared Services & Chief Administrative Officer. Before leaving the City of San Antonio, she served as Deputy City Manager for Planning and Development. In her current role, Ms. LeBlanc-Burley is responsible for all aspects of Human Resources Management, Supply Chain, Facilities and Information Services. Ms. LeBlanc-Burley holds a master's degree in urban studies from Trinity University.

Mr. John Moore joined CPS Energy on April 13, 2009, and serves as Executive Vice President of Energy Delivery Services (EDS). Mr. Moore most recently served as Vice President of Transmission and Interconnection for E.ON Climate and Renewables, a large developer and operator of wind generation. He previously worked as an independent consultant focused on electric and telecommunications utilities, and he helped with the start-up of Grande Communications as Vice President and General Manager for the Austin region. From 1997 to 2000, Mr. Moore was the Lower Colorado River Authority's Executive Manager of Business Development and Regulatory Affairs for Transmission, and he was General Manager of the City of Austin Electric Utility from 1984 to 1997. A graduate of the University of Texas at Austin, Mr. Moore holds a master of business administration degree.

Dr. Eugster became CPS Energy's first Chief Sustainability Officer (CSO) on May 4, 2009. Dr. Eugster most recently served as the City of Houston's Officer for Sustainable Growth. Dr. Eugster initially worked for a consulting firm, served as an officer of an energy hedge fund and ran his own consulting business before joining the City of Houston in 2007. Dr. Eugster received a Ph. D. in electrical engineering from the Massachusetts Institute of Technology. Dr. Eugster holds two patents dealing with nano-transmitter design and he has published more than 30 scientific papers. In his role as CSO, Dr. Eugster is responsible for CPS Energy's generation research and planning, environmental planning and compliance, and energy research and technology initiatives.

Ms. Shellman joined CPS Energy in July 2006. She previously served as General Counsel and Secretary for the Electric Reliability Council of Texas ("ERCOT"). Prior to that, she served as a partner in the utility sections of two separate Texas law firms. Ms. Shellman has also served as the Director for the Hearings Division of the Public Utility Commission of Texas ("PUCT") and as a hearing officer with the PUCT. In addition to serving as CPS Energy's General Counsel, she also serves as Chief Compliance Officer and Secretary to the Board. Ms. Shellman has an undergraduate degree from Vassar College and a law degree from the University of Oklahoma.

Mr. Peña has been an employee of CPS Energy since 1983 and has previously served as Superintendent of Plant Betterment, Maintenance and Betterment Services, Director of Engineering, Technical Services, and Human Resource 26 Development. Mr. Peña was promoted to Vice President of Gas Systems in January 2002 and named Vice President of Fossil Generation in 2007. He became Senior Vice President of Energy Development in December 2009. In his current role, he is responsible for Fuels Procurement; Marketing; Energy Market Operations; the JKS 2 Construction Project; and for STP Nuclear Ownership. Mr. Peña holds a master of business administration degree from Our Lady of the Lake University.

Mr. Kotara has been an employee of CPS Energy since 1985, and has held several leadership positions including Director of Gas Engineering, Director of Marketing, Director of Generation Control & Marketing, Director of Fuels, Vice President of the Gas Business Unit, Vice President of Wholesale Energy Markets and Executive Vice President of Energy Development. In his current role as Senior Vice President of Fossil Generation, Mr. Kotara is responsible for management of CPS Energy's fossil generation portfolio.

Mr. Saenz joined CPS Energy in January 2006, as Director of Retail Energy. He currently serves as Senior Vice President of Retail Energy and heads the company's retail functions, which include customer services; customer relationships and sales; strategic marketing; and economic development. Prior to joining CPS Energy, Mr. Saenz helped found Grande Communications Inc., a Central Texas-based bundled telecommunications firm. He also served as president and CEO of ExecuMark Inc., an executive consulting firm focused on sales and marketing strategies. Mr. Saenz also held executive positions with Central and South West Energy Services and Central Power & Light Company.

Mr. Hollingsworth serves as Chief Risk Officer. Mr. Hollingsworth is responsible for CPS Energy's Enterprise Risk Management Program that includes risk management policies and controls, management reporting and on-going company-wide risk assessments. In addition, Mr. Hollingsworth is responsible for credit risk management, insurance services, business continuity management and corporate security services. Mr. Hollingsworth is Co-Chair of CPS Energy's Enterprise Risk Management Committee, and a member of the Corporate Compliance Committee, Enterprise Financial Analysis Committee, and the Enterprise Technology Architecture Council. Mr. Hollingsworth's previous roles include: Senior Director, Enterprise Risk Management for R.W. Beck, Vice President of Finance for Cinergy Marketing and Trading, and Vice President and Chief Risk Officer for The Energy Authority. Mr. Hollingsworth was also employed by Goldman Sachs as Vice President in their commodity trading division, J. Aron and Company, and was a key person in the start-up of Arthur Andersen's Enterprise Risk Management Practice at their world headquarters in Chicago, IL.

Ms. Madison has been an employee of CPS Energy since 1976, and has held various positions in the financial and audit areas of the company. She has headed the internal audit function for CPS Energy since May 1988. In 2005, she was given the additional responsibility for the newly-established Ethics function for CPS Energy. In her role as the Chief Audit & Ethics Officer, Ms. Madison is responsible for leading a comprehensive program of internal audits and reviews for CPS Energy, as well as a comprehensive ethics program, and as such, has a direct reporting relationship to the Audit Committee of the Board of Trustees. Ms. Madison also serves as Chair of the STP Audit Group, which is responsible for conducting independent audits on behalf of the owners of STP. Ms. Madison holds a bachelor of business administration degree in accounting from The University of Texas at Austin. In addition, she is a CPA and a Certified Internal Auditor.

Mr. Campbell joined CPS Energy in August of 2004. As Senior Director of Governmental Relations and Communications for CPS Energy, Mr. Campbell is responsible for CPS Energy's federal, state and local government activities, as well as internal and external communications. Mr. Campbell served in a similar position with the City of San Antonio from 1997-2004. Prior to his appointments in municipal government, Mr. Campbell was Chief of Staff to Texas State Representative Tom Ramsay and Legislative Assistant and District Director to U.S. Congressman Jim Chapman. Mr. Campbell's private-sector experience includes employment with Houston Oil & Minerals Corporation and the Association of American Medical Colleges. He holds a bachelor's degree in political science, summa cum laude, from Texas A&M University.

Mr. Belmares joined CPS Energy in 2008 as Senior Director of Human Resources. He was appointed Acting Chief Administrative Officer prior to holding his current position as Chief of Staff. In his current role, Mr. Belmares is responsible for supporting the President & CEO in providing leadership in the development, implementation, and execution of strategies, directing the management and resolution of issues, ensuring complete and appropriate information is provided to the President & CEO and the Board, and providing oversight and direction related to project management and performance measurements. Previously, Mr. Belmares served more than nine years in various positions with the City of San Antonio, including Director of the Human Resources Department and Director of the Office of Innovation and Reform. While with the City he also oversaw the Office of Municipal Integrity and worked five years in the budget office, including two years as Budget Manager. Mr. Belmares holds a master's degree in urban administration from Trinity University.

27 Service Area

The CPS Energy electric system serves a territory consisting of substantially all of Bexar County and small portions of the adjacent counties of Comal, Guadalupe, Atascosa, Medina, Bandera, Wilson and Kendall. Certification of this service area was granted by the PUCT.

CPS Energy is currently the exclusive provider of retail electric service within this service area, including the provision of electric service to some Federal military installations located within the service area that own their own distribution facilities. As discussed below under "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – Electric Utility Restructuring in Texas; Senate Bill 7", until and unless the City Council and the Board exercise the option to opt-in to retail electric competition (called "Texas Electric Choice" by the PUCT), CPS Energy has the sole right to provide retail electric services in its service area. On April 26, 2001, after a thorough feasibility study was conducted and reviewed, the City Council passed a resolution stating that the City did not intend to opt-in to the deregulated electric market beginning January 1, 2002, the date Texas Electric Choice became effective. Senate Bill 7 ("SB 7"), adopted by the Texas Legislature in 1999, provides that electric "opt-in" decisions are to be made by the governing body or the body vested with the power to manage and operate a municipal utility such as CPS Energy. Given the relationship of the Board and the City Council, any decision to opt-in to electric competition would be based upon the adoption of resolutions by both the Board and the City Council. If CPS Energy and the City choose to opt-in, other retail electric energy suppliers would be authorized to offer retail electric energy in the CPS Energy service area and CPS Energy would be authorized to offer retail electric energy in any other service areas open to retail competition in ERCOT. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – ERCOT", herein. ERCOT is the independent entity that monitors and administers the flow of electricity within the interconnected grid that operates wholly within Texas. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - Interconnected System" and "CUSTOMER RATES – Governmentally Imposed Fees, Taxes or Payments" herein. CPS Energy has the option of acting in the role of the "Provider of Last Resort" (hereinafter defined) for its service area in the event it and the City choose to opt-in. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – Electric Utility Restructuring in Texas; Senate Bill 7" herein.

In addition to the area served at retail rates, CPS Energy sells wholesale electricity to the Floresville Electric Light & Power System, the City of Hondo, and the City of Castroville. As of July 31, 2010, these three wholesale supply agreements have remaining terms ranging from three to five years until expiration. Additionally, CPS Energy has agreements to provide partial supply to various other municipalities and cooperatives through June 2011. To optimize certain times when excess capacity is available, CPS Energy will consider entering into additional long-term wholesale electric power agreements in the future. The requirements under the existing wholesale agreements are firm energy obligations of CPS Energy.

The CPS Energy gas system serves the City and its environs, although there is no certificated CPS Energy gas service area. In Texas, no legislative provision or regulatory procedure exists for certification of natural gas service areas. As a result, CPS Energy competes against other gas supplying entities on the periphery of its service area. Pursuant to the authority provided by Section 181.026, Texas Utilities Code, among other applicable laws, the City has executed a license agreement ("License Agreement") with the City of Grey Forest, Texas ("Licensee"), dated as July 28, 2003, for a term through May 31, 2028. Pursuant to this License Agreement, the City permits the Licensee to provide, construct, operate and maintain certain natural gas lines within the boundaries of the City which it originally established in 1967 to provide extensions and other improvements thereto upon compliance with the provisions of the License Agreement and upon the payment to the City of a quarterly license fee of 3% of the gross revenues received by the Licensee from the sale of natural gas within the Licensed Area (as defined in the License Agreement). Thus, in the Licensed Area, CPS Energy is in direct competition with Grey Forest Utilities as a supplier of natural gas.

CPS Energy also has 20-year Franchise Agreements with 30 incorporated communities in the San Antonio area. These Franchise Agreements permit CPS Energy to operate its facilities in the cities' streets and public ways in exchange for a franchise fee of 3% on electric and natural gas revenues earned within their respective municipal boundaries. Of these 30 agreements, 24 expire in 2010. Of those 24, seventeen (17) have passed renewal ordinances as of October 31, 2010. The remaining seven (7) were automatically renewed for one year per terms of the agreement. The others expire in 2011, 2017, 2023, 2024 and 2029. In 2008, CPS Energy and the City of Castroville, a current wholesale power customer, reached an agreement whereby CPS Energy would operate and maintain the Castroville gas system through September 30, 2010. A new two-year contract effective October 1, 2010, with an option to extend for an additional year if both parties agree was signed in September 2010. A similar two-year agreement with an option to extend for an additional year if mutually agreeable to both parties was reached with the City of Lytle to operate and maintain the Lytle natural gas system commencing January 1, 2010.

28 Customer Base1 as of July 31, 2010

Electric Gas

Number Percent Number Percent

Residential 626,597 88% Residential 302,753 93% Commercial & Industrial 65,916 9% Commercial 17,990 6% All Night Security Lighting 11,646 2% Industrial & Public 2,776 1% Street Lighting, Public Authorities & Other Utilities 2 9,789 1% Total 713,948 100% Total 323,519 100%

(1) See "FIVE-YEAR ELECTRIC AND GAS SALES BY CUSTOMER CATEGORY" and "FIVE-YEAR STATEMENT OF NET REVENUES AND DEBT SERVICE COVERAGE" herein for information regarding consumption of energy and contribution of revenues to the Systems by the average customers for these categories as of July 31, 2010. (2) Also includes off-sytem sales customers.

Retail Service Rates

Under the Texas Public Utility Regulatory Act ("PURA"), significant original jurisdiction over the rates, services, and operations of "electric utilities" is vested in the PUCT. In this context, "electric utility" means an electric investor-owned utility. Since the electric deregulation aspects of SB 7 became effective on January 1, 2002, the PUCT's jurisdiction over electric investor-owned utility ("IOU") companies primarily encompasses only the transmission and distribution functions. PURA generally excludes municipally-owned utilities ("Municipal Utilities"), such as CPS Energy, from PUCT jurisdiction, although the PUCT has jurisdiction over electric wholesale transmission rates. See "Transmission Access and Rate Regulation" herein. Under the PURA, a municipal governing body or the body vested with the power to manage and operate a Municipal Utility such as CPS Energy has exclusive jurisdiction to set rates applicable to all services provided by the Municipal Utility with the exception of electric wholesale transmission activities and rates. Unless and until the City Council and Board choose to opt-in to electric retail competition, CPS Energy retail service electric rates are subject to appellate, but not original rate regulatory jurisdiction by the PUCT in areas that CPS Energy serves outside the San Antonio City limits. To date, no such appeal to the PUCT of CPS Energy retail electric rates has ever been filed. CPS Energy is not subject to the annual PUCT gross receipts fee payable by electric utilities. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – Electric Utility Restructuring in Texas; Senate Bill 7" herein.

The Texas Railroad Commission ("TRC") has significant original jurisdiction over the rates, services and operations of all natural gas utilities in the State. Municipal Utilities such as CPS Energy are generally excluded from regulation by the TRC, except in matters related to natural gas safety. CPS Energy retail gas service rates applicable to rate payers outside San Antonio are subject to appellate, but not original rate regulatory jurisdiction, by the TRC in areas that CPS Energy serves outside the City limits. To date, no such appeal to the TRC of CPS Energy retail gas rates has ever been filed. In the absence of a contract for service, the TRC also has jurisdiction to establish gas transportation rates for service to Texas State Agencies by a Municipal Utility. A Municipal Utility is also required to sell gas to and transport State-owned gas for "public retail customers," including State agencies, State institutions of higher education, public school districts, United States military installations, and United States Veterans Affairs facilities, at rates provided by written contract between the Municipal Utility and the buyer entity. If agreement to such a contract cannot be reached, a rate would be set by the legal and relevant regulatory body.

The City has covenanted and is obligated under the Bond Ordinances, as provided under the rate covenant, to establish and maintain rates and collect charges in an amount sufficient to pay all maintenance and operating expenses of the Systems and to pay the debt service requirements on all revenue debt of the Systems, including the outstanding Senior Lien Obligations, any Additional Senior Lien Obligations, the currently outstanding Junior Lien Obligations (including the Bonds), Liquidity Facility obligations, any Additional Junior Lien Obligations, the Notes and Inferior Lien Obligations, and to make all other payments prescribed in the Bond Ordinances.

29 Base rate changes over the past 18 years have consisted of a 4% combined electric and gas base rate increase effective January 31, 1991; a 3.5% electric base rate adjustment effective May 19, 2005 that was more than offset by a reduction in fuel costs, resulting from the purchase of an increased interest in STP 1 and 2 (defined herein); a 12.1% gas base rate adjustment effective June 26, 2006; and a 3.5% system average electric and gas base rate increase that became effective on September 1, 2008; and a 7.5% electric base rate increase and a 8.5% gas base rate increase that became effective on March 1, 2010. This most recent base rate increase is discussed in greater detail below.

On February 18, 2010, the City Council unanimously approved CPS Energy's request for a 7.5% electric base rate increase and an 8.5% gas base rate increase, which is expected to result in a 4.2% bill impact per customer. The electric base rate increase was requested primarily as a result of increases in debt service resulting from the CPS Energy's capital plan that includes a new coal generation plant, J.K. Spruce 2 ("JKS 2"), LM6000 Gas Combustion Turbine Peakers and environmental upgrades to CPS Energy's coal plants, which include fuel gas desulfurization ("FGD") scrubbers and selective catalytic reduction ("SCR") equipment. The 4.2% bill impact includes a reduction in fuel costs resulting from the JKS 2 plant that was previously placed into service on May 28, 2010. See "DESCRIPTION OF PHYSICAL PROPERTY –Electric System – Generating Station Events" herein. CPS Energy expects to continue to periodically seek electric and gas base rate increases that are intended to maintain debt coverage, debt to equity and liquidity ratios.

The 2005 electric rate adjustment was intended to cover the incremental costs to be incurred due to acquiring an additional 12% share in the STP. While base rates increase because of the acquisition of additional nuclear generation (the ownership interest in Units 1 and 2 was raised from 28% to 40%), the benefit from the lower priced nuclear power reduced customer bills overall. This acquisition was completed in May 2005. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - South Texas Project" herein. CPS Energy also offers a monthly contract for renewable energy service (currently this is wind-generated electricity) under Rider E15. The rate for Rider E15 was reduced to its current level effective on September 30, 2002. A rider to the SLP rate, the Economic Incentive Rider E16, became effective March 10, 2003, and offers discounts off the SLP demand charge for a period up to four years for new or added load of at least 10 megawatts ("MW"). Under certain conditions, the discount may be extended an additional three years. Customers that choose Economic Incentive Rider E16 must also meet City employment targets and targets for purchases of goods or services from local businesses in order to qualify. CPS Energy also has rates that permit recovery of certain miscellaneous customer charges and for extending lines to provide gas and electric service to its customers. In May 2005, the Board adopted a change to its policies for both miscellaneous customer charges and line extensions, which became effective January 1, 2006, increasing charges that had not been raised since 1986. The City Council approved certain price changes in the Board-approved policy; however, the City ordinances prevented recovery of increased line extension charges from developers of affordable housing and the City delayed implementation of certain miscellaneous customer charges until April 1, 2006 (fees for disconnection, reconnection and field notification).

In June of 2007, the City Council passed an ordinance authorizing the creation of a five-year pilot program to develop electric and gas value-added premium based optional services. The initial optional services are limited to a specified number of qualified customers and include a: (1) Fixed Bill Program, (2) Flat Rate Program, (3) Windtricity Rider, and (4) Load Factor Rate Program.

In May 2009, the City Council passed a mechanism to fund CPS Energy's Save for Tomorrow Energy Plan ("STEP") energy efficiency and conservation program, which will largely be funded through changes in the electric fuel adjustment fee. Each of CPS Energy's retail and wholesale rates contains an electric fuel adjustment or gas cost adjustment clause, which provides for current recovery of fuel costs. The fuel cost recovery adjustments are set at the beginning of each CPS Energy billing cycle month. See "CUSTOMER RATES – Fuel and Gas Cost Adjustment" herein.

Transmission Access and Rate Regulation

Pursuant to amendments made by the Texas Legislature in 1995 to the PURA ("PURA95"), Municipal Utilities, including CPS Energy, became subject to the regulatory jurisdiction of the PUCT for transmission of wholesale energy. PURA95 requires the PUCT to establish open access transmission on the interconnected Texas grid for all utilities, co-generators, power marketers, independent power producers and other transmission customers.

The 1999 Texas Legislature amended the PURA95 to expressly authorize rate authority over Municipal Utilities for wholesale transmission and to require that the postage stamp method be used exclusively for pricing wholesale transmission transactions. The PUCT in late 1999 amended its transmission rule to incorporate fully the postage stamp pricing method which sets the price for transmission at the system average for ERCOT. CPS Energy's wholesale open access transmission charges are set out in tariffs filed at the PUCT, and are based on its transmission cost of service approved by the PUCT, representing CPS Energy's input to the calculation of the statewide postage stamp pricing method. The PUCT's rule, consistent with provisions in PURA §35.005(b), also provides that the PUCT may require 30 construction or enlargement of transmission facilities in order to facilitate wholesale transmission service. Additional information on recovery of ERCOT transmission fees is discussed in "CUSTOMER RATES – Governmentally Imposed Fees, Taxes or Payments" and with respect to the transition to the nodal market is discussed in "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – Post Senate Bill 7 Wholesale Market Design Developments" herein.

CUSTOMER RATES

CPS Energy's electric and gas monthly rate schedules list the currently effective monthly charges payable by CPS Energy customers. Each rate schedule briefly describes the types of service CPS Energy renders to customers billed in accordance with that rate schedule, plus customer eligibility criteria. Customers with similar load and usage characteristics are grouped into rate classes and are billed in accordance with the same rate schedule. The different electric rate classes include rate schedules for residential, commercial, and industrial customers. There are also rate schedules for street lighting, other utilities and all night security lights. The gas rate schedules are categorized into general, commercial and industrial.

Fuel and Gas Cost Adjustment

The rates feature a fuel cost adjustment provision in the electric rates and a gas adjustment provision in the gas rates which allow CPS Energy to reconcile fuel and gas cost variances above or below fuel levels included in base rates. CPS Energy's electric rates are subject to a positive or negative monthly adjustment equal to the variance in the price of fuel above or below a base cost of $0.01416 per kWh ("kilowatt-hour"). Similarly, CPS Energy's base gas rates are subject to an adjustment equal to the variance in the price of fuel above or below a base cost of $0.220 per CCF (100 cubic feet).

On May 21, 2009, the City Council approved a funding mechanism for the STEP program. The total cost of the STEP program during the 2009 to 2020 time period is estimated at $849 million with annual costs ranging from $12.3 million to over $77 million. While approximately $8 million a year is recovered through existing base rates annually, the additional costs for the STEP program will be recovered through a STEP surcharge applied to the electric fuel adjustment. If energy use is reduced to levels predicted, the benefits of this program should exceed the implementation costs. CPS Energy will reassess the STEP program in calendar year 2019 to determine if continuing the program beyond 2020 is a viable option based on projected annual reductions in energy consumption going forward and the costs that would be incurred to achieve such reductions. For additional information on CPS Energy's STEP energy efficiency and conservation program, see "ENERGY CONSERVATION AND PUBLIC SAFETY PROGRAMS", herein.

Governmentally Imposed Fees, Taxes or Payments

The rates, as previously approved by various rate ordinances adopted by the City Council, may be adjusted without further action by the City Council to reflect the increase or decrease in fees, taxes or other required payments to governmental entities or for governmental or municipal purposes which may be hereafter assessed, imposed, or otherwise required and which are payable out of or are based upon net revenues of the Systems.

In March 2000, two new governmental assessments resulting from regulatory changes in the Texas electric utility industry, including the open access wholesale transmission charges, were added to CPS Energy's electric billings as regulatory adjustments and are updated annually or as needed. The first assessment recovers additional ERCOT-related transmission expenditures not recovered through CPS Energy's current base rates. For residential CPS Energy customer rates, this adjustment (effective January 2010) currently adds an additional $0.00286 per kWh sold. The second assessment relates to CPS Energy's share of the cost to fund the staffing and operation of the Independent System Operator ("ISO") for ERCOT, the implementation of the nodal market within ERCOT, as well as other market-related costs due to congestion and voltage reliability issues. The PUCT retains oversight authority over ERCOT. For residential CPS Energy customers, this charge increases bills by an additional $0.00132 per kWh sold.

In March 2005, the TRC began imposing a regulatory fee to cover the cost of regulation by the TRC. The fee is based upon the number of active gas customers and is recovered from CPS Energy gas customers through the payment of an annual fee assessed one time during the year.

31 TEN-YEAR ELECTRIC CUSTOMER STATISTICS1 Fiscal Years Ended January 31, 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20102 RESIDENTIAL Average Monthly KWh/ Customer 1,190 1,141 1,154 1,174 1,159 1,217 1,247 1,164 1,187 1,233 1,205 Average Monthly Bill/ Customer $85.55 $77.53 $81.54 $94.06 $87.39 $99.59 $98.27 $91.98 $107.60 $107.00 $106.23 Average Monthly Revenue/KWh $0.0719 $0.0679 $0.0707 $0.0801 $0.0754 $0.0818 $0.0788 $0.0790 $0.0906 $0.0868 $0.0881

COMMERCIAL AND INDUSTRIAL Average Monthly KWh/ Customer 11,145 11,116 11,334 12,174 11,345 11,187 11,036 10,887 10,856 10,685 10,722 Average Monthly Bill/ Customer $629.98 $594.33 $631.54 $790.31 $691.48 $754.65 $710.85 $722.94 $828.72 $801.81 $808.34 Average Monthly Revenue/KWh $0.0565 $0.0535 $0.0557 $0.0649 $0.0609 $0.0675 $0.0644 $0.0664 $0.0763 $0.0750 $0.0754

ALL CUSTOMERS Average Monthly KWh/ Customer 2,475 2,404 2,434 2,440 2,401 2,471 2,499 2,392 2,419 2,427 2,409 Average Monthly Bill/ Customer $154.65 $142.08 $151.31 $173.82 $159.88 $180.27 $174.92 $170.01 $197.33 $192.98 $192.83 Average Monthly Revenue/KWh $0.0625 $0.0591 $0.0622 $0.0712 $0.0666 $0.0730 $0.0700 $0.0711 $0.0816 $0.0795 $0.0800

(1) Excludes unbilled revenues and off-system sales. (2) Twelve months ended July 31, 2010.

HISTORICAL RECORD OF CITY OF SAN ANTONIO GENERAL FUND BENEFITS FROM CITY'S ELECTRIC AND GAS UTILITY SYSTEMS (Dollars in thousands)

Fiscal Years Ended January 31, Payments 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20101 To City2, 3 $ 185,006 $ 168,135 $ 172,235 $ 206,057 $ 194,901 $ 227,178 $ 235,898 $ 247,854 $ 282,140 $ 260,636 $ 268,447

(1) Twelve months ended July 31, 2010. (2) Payments to theCity, by ordinance,are notto exceed14%of CPSEnergy'sgrossrevenue(includeswholesale revenues), and includescash paymentsandrefund of charges for furnishing the City electricity and gas services, and for a street light replacement program. (3) Excludes additional payments to the City. See CONSTRUCTION PROGRAM" herein.

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32 FIVE-YEAR ELECTRIC AND GAS SALES BY CUSTOMER CATEGORY

Fiscal Years Ended January 31, 2006 2007 2008 2009 2010 20101 ELECTRIC S YS TEM SALES IN KWH2 Residential 8,052,142,783 8,546,981,548 8,247,226,694 8,608,618,534 9,104,633,143 8,989,235,953 Commercial & industrial 8,074,456,666 8,264,544,798 8,345,090,126 8,479,360,921 8,392,016,225 8,472,189,653 Street lighting 81,014,821 91,350,091 90,270,267 91,489,154 91,614,934 91,708,189 Public authorities 1,965,844,597 2,218,197,824 2,236,166,801 2,395,159,428 2,394,638,258 2,476,416,735 Other utilities 1,849,949,855 2,958,437,090 3,930,778,217 3,526,629,066 3,041,256,493 3,996,545,090 ANSL3 20,850,505 21,199,115 21,410,010 23,514,275 23,417,810 23,498,050 Total sales in KWH 20,044,259,227 22,100,710,466 22,870,942,115 23,124,771,378 23,047,576,863 24,049,593,670

AVERAGE NUMBER OF CUSTOMERS Residential 551,355 571,148 590,560 604,275 615,496 621,416 Commercial & industrial 60,145 62,407 63,875 65,090 65,448 65,846 Street lighting 422 2,320 2,299 2,310 2,319 2,321 Public authorities 6,293 5,628 6,033 6,255 6,621 6,893 Other utilities 20 18 19 23 24 29 ANSL3 10,725 10,953 11,212 11,407 11,556 11,594 Total customers 628,960 652,474 673,998 689,360 701,464 708,099

KWH SALES PER CUSTOMER Residential 14,604 14,965 13,965 14,246 14,792 14,466 Commercial & industrial 134,250 132,430 130,647 130,271 128,224 128,667

GAS SYSTEM SALES IN MCF2 Residential 9,794,730 9,474,163 10,742,076 9,415,723 10,497,562 12,182,152 Commercial 8,420,965 8,719,182 9,026,441 8,916,308 9,330,700 10,182,557 Industrial 1,184,875 1,095,727 973,020 815,360 848,333 745,830 Public authorities 2,258,826 2,081,997 2,138,054 2,040,126 2,149,677 2,382,026 Total sales in MCF 21,659,396 21,371,069 22,879,591 21,187,517 22,826,272 25,492,565

AVERAGE NUMBER OF CUSTOMERS Residential 288,898 292,083 296,173 298,996 300,646 301,538 Commercial 18,411 18,237 18,260 18,164 18,124 18,061 Industrial 80 76 67 63 60 54 Public authorities 2,373 2,540 2,729 2,765 2,771 2,749 Total customers 309,762 312,936 317,229 319,988 321,601 322,402

MCF SALES PER CUSTOMER Residential 34 32 36 31 35 40 Commercial 457 478 494 491 515 564 Industrial 14,811 14,417 14,523 12,942 14,139 13,812

(1) Twelve months ended July 31, 2010. (2) Excludes unbilled revenues. (3) All Night Security Lighting.

33 FIVE-YEAR STATEMENT OF NET REVENUES AND DEBT SERVICE COVERAGE2 Fiscal Years Ended January 31,

2006 2007 20083 2009 2010 20101 ELECTRIC S YS TEM

BILLED REVENUES Residential $658,916,783 $673,553,856 $651,864,884 $780,252,955 $790,296,616 $792,164,102 Commercial & industrial 544,660,000 532,343,750 554,137,294 647,298,754 629,721,617 638,709,266 Street lighting 11,414,666 11,314,041 11,617,586 12,914,300 13,367,606 13,910,383 Public authorities 117,661,362 127,237,302 131,412,709 160,622,388 160,157,270 162,746,286 Other utilities 107,656,944 145,115,015 206,176,165 258,311,828 132,204,411 158,351,066 ANSL4 3,298,367 3,254,248 3,347,817 3,993,057 4,100,464 4,278,779 Other 15,951,021 13,751,476 30,240,548 17,023,901 10,774,022 5,719,092 Total revenues 1,459,559,143 1,506,569,688 1,588,797,003 1,880,417,183 1,740,622,006 1,775,878,974

OPERATION & MAINTENANCE EXP ENS E Production 499,098,803 531,000,491 579,840,563 781,103,466 622,600,068 598,209,291 Transmission 12,029,652 16,441,817 13,666,229 16,213,504 44,313,394 36,923,436 Distribution 61,000,014 74,886,837 83,258,140 83,712,446 79,771,716 74,225,394 Regulatory assessments 37,083,246 28,644,959 23,192,383 31,256,674 36,032,960 35,893,660 Customer accounts 18,673,088 22,523,086 24,458,144 25,682,308 28,221,506 24,325,208 Customer information 1,436,331 791,074 730,354 371,983 333,875 386,751 Administrative & general 77,595,068 58,947,387 75,724,322 82,020,830 38,347,373 63,260,577 Payroll taxes 7,496,083 4,651,131 5,243,744 4,854,833 4,690,119 4,578,277 STP decommissioning expense 4,380,000 4,380,000 4,380,000 - 2,219,004 2,217,480 STP operation & maintenance expense 131,601,697 149,100,712 160,391,746 177,527,723 183,478,195 202,575,133 Total expenses 850,393,982 891,367,494 970,885,625 1,202,743,767 1,040,008,210 1,042,595,207 Operating income - electric 609,165,161 615,202,194 617,911,378 677,673,416 700,613,796 733,283,767

GAS SYSTEM

BILLED REVENUES Residential 119,685,785 120,927,007 137,646,461 128,136,627 117,178,502 141,204,090 Commercial & industrial 102,757,554 99,297,749 100,796,578 105,357,182 80,310,178 92,378,514 Public authorities 21,707,539 19,766,696 19,987,023 20,498,684 16,252,552 19,364,806 Other 1,153,715 1,144,716 1,375,480 1,454,758 1,553,615 1,463,464 Total revenues 245,304,593 241,136,168 259,805,542 255,447,251 215,294,847 254,410,874

OPERATION & MAINTENANCE EXP ENS E Gas purchased 170,893,663 174,793,863 166,763,181 164,422,577 127,097,295 148,027,338 Distribution 16,648,494 18,694,494 16,984,251 17,571,652 16,377,773 14,884,800 Customer accounts 9,197,192 11,093,460 12,046,548 12,649,495 13,900,145 11,981,072 Customer information 478,777 263,691 243,451 123,994 111,292 128,917 Administrative & general 8,302,787 6,219,420 7,623,412 8,334,621 3,916,067 6,445,487 Payroll taxes 1,120,105 694,997 783,548 725,435 700,822 684,110 Total expenses 206,641,018 211,759,925 204,444,391 203,827,774 162,103,394 182,151,724 Operating income - gas 38,663,575 29,376,243 55,361,151 51,619,477 53,191,453 72,259,150

Combined operating income - Electric and gas 647,828,736 644,578,437 673,272,530 729,292,893 753,805,249 805,542,917 Nonoperating income5 50,063,264 74,524,014 94,710,771 55,458,451 25,185,995 24,248,826 Net revenues, per ordinances $697,892,000 $719,102,451 $767,983,301 $784,751,344 $778,991,244 $829,791,743

DEBT SERVICE Senior lien obligations - Principal and interest $256,442,059 $271,931,037 $290,953,913 $309,855,256 $332,540,132 $347,915,799 Junior lien obligations - interest 10,964,118 15,005,843 15,179,106 11,190,153 6,987,126 6,742,145 Interest on commercial paper 7,693,133 8,503,062 14,378,366 8,613,289 1,999,500 1,519,532 Total debt service $275,099,311 $295,439,942 $320,511,385 $329,658,698 $341,526,758 $356,177,476

DEBT SERVICE COVERAGE Senior & junior lien obligations, commercial paper and FRRN 2.54x 2.43x 2.40x 2.38x 2.28x 2.33x Senior lien obligations 2.72x 2.64x 2.64x 2.53x 2.34x 2.39x

(1) Twelve months ended July 31, 2010. (2) Excludes component units. (3) Includes a reclass between Electric & Gas Administrative & general and STP operation & maintenance expense subsequent to prior publications. (4) All Night Security Lighting. (5) Excludes Fair Value Adjustments and gain/loss from ineffective hedging transactions.

34 FORWARD-LOOKING STATEMENTS

This Remarketing Memorandum, including the Appendices hereto, contains forward-looking statements within the meaning of the federal securities laws. Such statements are based on currently available information, expectations, estimates, assumptions and projections, and management's judgment about the power utility industry and general economic conditions. Such words as "expects", "intends", "plans", "believes", "estimates", "anticipates" or variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not guarantees of future performance. Actual results may vary materially from what is contained in a forward-looking statement. Factors which may cause a result different from those expected or anticipated include, among other things, new legislation, increases in suppliers' prices, particularly prices for fuel in connection with the operation of the Systems, changes in environmental compliance requirements, acquisitions, changes in customer power use patterns, natural disasters and the impact of weather on operating results.

Although CPS Energy believes in making any such forward-looking statement, its expectations are based on reasonable assumptions, any such forward-looking statement involves uncertainties and is qualified in its entirety by reference to factors both identified within this Remarketing Memorandum and from publicly available resources about the electric and gas businesses, regulation and regulatory authorities for that business, and the City that could cause the actual results of CPS Energy to differ materially from those contemplated in such forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and CPS Energy undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for CPS Energy to predict all of such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward- looking statement.

MANAGEMENT DISCUSSION

CPS Energy's audited financial statements for the fiscal years ended January 31, 2010 and 2009, and the Independent Auditors' report thereon are in APPENDIX B. As described herein, CPS Energy adopted Statement No. 34 of the Governmental Accounting Standards Board ("GASB") during its fiscal year ended January 31, 2002, which required the preparation of a Management Discussion and Analysis ("MD&A") in connection with the annual financial report of CPS Energy. Reference is hereby made to APPENDIX B for the MD&A pertaining to the CPS Energy fiscal year ended January 31, 2010. Unaudited financial results for the 12 months ended July 31, 2010 and 2009 are shown in APPENDIX C. The Management Discussion set forth below pertains to the financial results of CPS Energy for the 12-month period ended July 31, 2010.

The operating results of the Systems reflect the results of past operations and are not necessarily indicative of results of operations for any future period. Future operations will be affected by factors relating to changes in rates, fuel and other operating costs, utility industry regulation and deregulation, environmental regulation, economic growth of the community, population, weather, and other matters; the nature and effect of which cannot at present be determined. See "FORWARD-LOOKING STATEMENTS" herein.

IMPLEMENTATION OF NEW ACCOUNTING POLICIES

This section of the Remarketing Memorandum describes various GASB pronouncements, as assessed and implemented by CPS Energy, where applicable. Any (Note) reference relates to items in CPS Energy's fiscal year 2010 annual report.

 GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets. This Statement provides additional guidance for accounting and reporting standards for intangible assets. The objective of this Statement is to reduce inconsistencies in financial reporting by providing further guidance on classification, recognition, measurement, impairment, presentation and disclosures related to intangible assets. There was no impact to the CPS Energy's financial statements as a result of this implementation.

 GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. This Statement addresses the recognition, measurement and disclosure of information regarding derivative instruments entered into by state and local governments. It generally requires that derivatives be reported on the balance sheet at fair 35 value and realized and unrealized gains/losses be reported on the statement of revenues, expenses and change in fund net assets. As an exception, hedge accounting would be required for potential hedging derivative instruments that are determined to be effective. Under hedge accounting, gains/losses are reported on the balance sheet as deferred credits/charges until expiration of the contract, at which time the deferred credits/charges are reported as an adjustment to the underlying hedged transaction. Disclosure requirements are presented on Note 11 – Other Financial Instruments.

 GASB Statement No. 55, The Hierarchy of Generally Accepted Accounting Principles for State and Local Governments. The GAAP hierarchy governs what constitutes GAAP for all state and local governmental entities. It lists the order of priority of pronouncements that a governmental entity should look to for accounting and financial reporting guidance. There was no impact to the CPS Energy's financial statements as a result of this implementation.

 GASB Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards. The objective of GASB Statement No. 56 is to incorporate three issues that were not previously addressed in the authoritative literature that establishes accounting principles— going concern considerations, related party transactions and subsequent events. These issues are currently addressed in the AICPA Statements on Auditing Standards; however, the GASB staff felt they would be more appropriately included in the accounting and financial reporting standards than in the auditing literature. The purpose of the statement is not to issue new guidance, but to incorporate existing guidance into the GASB standards to improve financial reporting by consolidating all sources of generally accepted accounting principles for state and local governments into one source. There was no impact to the CPS Energy's financial statements as a result of this implementation.

For the fiscal year ended January 31, 2009, CPS Energy implemented:

 GASB Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations. This statement provides guidance that explains when pollution remediation-related obligations should be reported and how pollution remediation costs and liabilities should be determined. Disclosure requirements are presented in Note 16 – Pollution Remediation Obligation.

 GASB Technical Bulletin 2008-1, Determining the Annual Required Contribution Adjustment for Postemployment Benefits. This technical bulletin provides guidance that allows the annual required contribution ("ARC") adjustment for other postemployment benefits ("OPEBs") to be based on actual amounts associated with the amortization of past contribution deficiencies and excesses included in the ARC in cases in which those amounts are known by the actuary. No impact resulted from the guidance provided under this Technical Bulletin.

In addition to the GASB items described above, CPS Energy changed its method of accounting for the Decommissioning Trusts beginning in fiscal year 2009. Under the new method, a pro rata share of total decommissioning costs (as determined by the most recent cost study) has been recognized as a liability. In subsequent years, annual decommissioning expense and an increase in the liability will reflect the effects of inflation and an additional year of plant usage.

Additionally, due to requirements under the Code of Federal Regulations governing nuclear decommissioning trust funds, guidance under Financial Accounting Standard ("FAS") 71, Accounting for the Effects of Certain Types of Regulation, has been followed. Under this guidance, the zero fund net assets approach to accounting for the Decommissioning Trusts ("Trusts") has been retained. In accordance with FAS 71, the cumulative effect of activity in the Trusts has been recorded as a regulatory liability reported on the balance sheets as net costs refundable through future rates since any excess funds are payable to customers. Going forward, prolonged unfavorable economic changes could result in the assets of the Trusts being less than the estimated decommissioning liability. In that case, instead of an excess as currently exists, there would be a deficit that would be reported as net costs recoverable through future rates. This amount would be receivable from customers.

Current-year activity in the Trusts has been reported in the nonoperating income (expense) section of the Statements of Revenues, Expenses and Changes in Fund Net Assets as net costs recoverable (refundable) through future rates. There was no impact to fund net assets as a result of this change in accounting method. Prior-year amounts have been reclassified to conform to current-year presentation.

36 Other than the aforementioned changes, there were no additional significant accounting principles or reporting changes implemented in the fiscal year ending January 31, 2010. Other accounting and reporting changes that occurred during the prior reporting year continued into the fiscal year ending January 31, 2010. These accounting changes and the effects on the financial statements are described in greater detail in the MD&A and in the notes to the audited financial statements included in APPENDIX B.

PENSION AND OTHER POST EMPLOYMENT BENEFITS

CPS Energy provides Pension and Other Post Employment Benefits ("OPEBs") for its employees. There are four plans which include: the Pension Plan, the Group Health Plan, the Group Life Insurance Plan, and the Disability Income Plan (the Group Health Plan, the Group Life Insurance Plan, and the Disability Income Plan, collectively referred to herein as the "Employee Benefit Plans"). All plans are reported on a calendar year basis. While all plans are separately and independently audited, CPS Energy discloses relevant information about them in its Notes or Financial Statements. See "Basic Financial Statements – Note 8 – Employee Pension Plan and Note 9 – Other Postemployment Benefits" in Appendix B ("Notes 8 & 9").

Pension Plan

The Pension Plan is a self-administered, single-employer, defined-benefit contributory pension plan and provides retirement and ancillary benefits for all CPS Energy employees who complete a minimum period of service and/or otherwise become eligible. The benefits provided by the Pension Plan are paid from a Pension Trust Fund established by CPS Energy that is kept separate from and in addition to the benefits employees are entitled to receive under any other CPS Energy program and under the federal Social Security Act. This Pension Plan and the Pension Trust Fund were established by the Board in accordance with applicable law and are maintained for the exclusive benefit of the eligible employees and their beneficiaries. Consistent with the GASB Statement No. 14 Implementation Guide, the Pension Plan is not categorized as a component unit of CPS Energy.

Employee Benefit Plans

The Employee Benefit Plans are single-employer contributory plans that are funded by employee contributions and annual contributions from CPS Energy as determined by the Board in accordance with applicable law. The assets of the Employee Benefit Plans are stated at fair market value.

The Group Health and the Group Life Insurance plans provide benefits for employees, their spouses, and covered dependents. Additionally, most CPS Energy employees are also eligible for these benefits upon retirement. CPS Energy established each plan as a "risk pool" as that term is defined in the Texas Political Subdivision Employees Uniform Group Benefits Act ("Act"), Chapter 172 Texas Local Government Code. These plans are each operated at all times and in all respects as a risk pool under the Act. CPS Energy's Disability Income Plan, also established as a risk pool, provides income to eligible employees of CPS Energy who become disabled.

Prior to fiscal year 2008, the Employee Benefit Plans were reported as component units of CPS Energy, and their financial results were blended with those of CPS Energy. In order to properly implement GASB Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pension, the Employee Benefit Plans were removed as component units from the CPS Energy financial statements for fiscal year 2008 forward. Additionally, the fiscal year 2007 financial statements were restated with the removal of these component units for ease of comparability.

PENSION AND OPEB LIABILITIES

Actuarial Value of Plan Assets

CPS Energy annually retains an actuarial firm to perform actuarial valuations for the Pension Plan and each of the Employee Benefit Plans. Conducted in accordance with generally accepted actuarial principles and practices, the actuarial reports summarize the funding status of each plan for the current and prior year. The reports also provide projected funding contribution requirements for CPS Energy's next fiscal year. The actuarial value of the assets of each

37 of the plans represents an adjusted value determined by the actuary, in accordance with industry standards, and therefore will not equal the amounts shown in the plans' balance sheets.

Actuarial Accrued Liability

The Actuarial Accrued Liability ("AAL") is calculated on a present value basis. Significant actuarial assumptions used in the calculations include, but are not limited to, rates of mortality, rates of retirement, the estimated number of participants expected to withdraw from the program(s), expected base salary increases, overtime rates, disability rates, medical cost increases, and investment returns. The AAL includes liabilities for current retirees and active employees for benefits at retirement.

Use of Assumptions and Estimates

As set forth herein and in Notes 8 & 9 of Appendix B, the disclosures relating to the Pension Plan and the OPEBs are based upon certain assumptions and estimates that may vary based upon the risk factors. To the extent that these assumptions and estimates do not materialize or are inaccurate, the financial information disclosed herein and in Notes 8 & 9 of Appendix B, including the estimates as compared to the actual values of the assets and liabilities, could change substantially and in a materially adverse manner. The actuarial values determined for benefit plan assets and liabilities include reasonable assumptions, which are estimates based on information available at the time the study was conducted. On June 30, 2006, GASB issued Technical Bulletin regarding the Medicare Part D subsidy. The Part D subsidy pertains to benefits beginning January 1, 2006. The Technical Bulletin clarified that the Medicare Part D subsidy should be excluded when reporting the AAL. The Group Health Plan AAL, as reported below, excludes any offset in costs resulting from the government subsidizing voluntary prescription drug benefits under Part D of the Social Security Act, established as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003.

Pension and Employee Benefit/OPEB Funding

The following schedule on the next page outlines CPS Energy's Pension and OPEB funding status based on Actuarial Valuation Dates of January 1, 2009, January 1, 2008 projected to February 1, 2009 and January 1, 2007 projected to February 1, 20081. Although CPS Energy is not contractually required to make contributions to fund the future liabilities of the Employee Benefit Plans, it has been voluntarily doing so since 1992.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

(1) The valuation methodology was changed for the two years reported with February 1 valuation dates, to collect data and asset information as of January 1 of the previous plan year and project to February 1 of the next year based on assumptions. This methodology was discontinued for the period reported with January 1, 2009 valuation date and data was collected and asset information as of January 1, 2009, was used for the valuation for Fiscal Year Beginning February 1, 2010. 38 PENSION AND EMPLOYEE BENEFIT PLANS ($ in millions)

(A) Actuarial Value of Assets (B) Actuarial Accrued Liability ("AAL")2

Actuarial Valuation Date 1:

Jan. 1, 2008 Jan. 1, 2007 Jan. 1, 2008 Jan. 1, 2007 projected to projected to projected to projected to Jan. 1, 2009 Feb. 1, 2009 Feb. 1, 2008 Jan. 1, 2009 Feb. 1, 2009 Feb. 1, 2008 Pension$ 1,067.8 $ 1,145.0 $ 1,084.6 $ 1,184.0 $ 1,169.3 $ 1,103.9

OPEBs: Group Health$ 199.2 $ 204.3 $ 194.9 $ 198.3 $ 219.4 $ 247.3

Group Life 46.8 49.6 49.1 36.1 35.5 33.0

Disability 3.6 3.8 3.7 6.9 6.6 5.7

Total OPEBs$ 249.6 $ 257.7 $ 247.7 $ 241.3 $ 261.5 $ 286.0

(B) - (A) Unfunded AAL (A) / (B) Funded Ratio

Actuarial Valuation Date 1: Jan. 1, 2008 Jan. 1, 2007 Jan. 1, 2008 Jan. 1, 2007 projected to projected to projected to projected to Jan. 1, 2009 Feb. 1, 2009 Feb. 1, 2008 Jan. 1, 2009 Feb. 1, 2009 Feb. 1, 2008

Pension$ 116.1 $ 24.3 $ 19.3 90.2% 97.9% 98.3% OPEBs: Group Health$ (0.9) $ 15.1 $ 52.4 100.5% 93.1% 78.8%

Group Life (10.7) (14.1) (16.1) 129.7% 139.7% 148.7% Disability 3.3 2.8 2.0 52.3% 57.2% 65.3% total OPEBs$ (8.3) $ 3.8 $ 38.3 103.4% 98.5% 86.6%

1) The valuation methodology was changed for the two years reported with February 1 valuation dates, to collect data and asset information as of January 1 of the preious plan year and project to February 1 of the next year based on assumptions. This methodology was discontinued for the period reported with January 1, 2009 valuation date and data was collected and asset information as of January 1, 2009 was used for the valuation for Fiscal Year Beginning February 1, 2010.

2) Includes liabilities for retirees, fully eligible actives, and actives not yet fully eligible. The Group Health Plan does not reflect Medicare Part D Subsidy of approximately $39.8 million for January 1, 2009, $47.9 million for February 1, 2009, and $42.7 million for February 1, 2008.

39 CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY

The Electric Utility Industry Generally

The electric utility industry in general has been, and in the future may be, affected by a number of factors which could impact the business affairs, financial condition and competitiveness of an electric utility and the level of utilization of generating facilities, such as those of the Systems. One of the most significant of these factors is the effort on national and local levels to restructure the electric utility industry from a heavily regulated monopoly to an industry in which there is open competition for power supply on both the wholesale and retail level. For a description of the competition in the electric utility industry in Texas and the response of the Systems thereto, see "Electric Utility Restructuring in Texas; Senate Bill 7" herein.

In addition, such factors include, among others, (i) effects of compliance with rapidly changing environmental, safety, licensing, regulatory and legislative requirements, (ii) changes resulting from conservation and demand-side management programs on the timing and use of electric energy, (iii) changes that might result from a national energy policy, (iv) increased competition from independent power producers, (v) "self-generation" by certain industrial and commercial customers, (vi) issues relating to the ability to issue tax-exempt obligations, (vii) severe restrictions on the ability to sell to non-governmental entities electricity from generation projects financed with outstanding tax-exempt obligations, (viii) changes from projected future electricity requirements, (ix) increases in costs, (x) shifts in the availability and relative costs of different fuels, and (xi) effects of the financial difficulties confronting the power marketers. Any of these factors (as well as other factors) could have an effect on the financial condition of any given electric utility and likely will affect individual utilities in different ways. CPS Energy cannot predict what future effects these factors may or will have on its business operations and financial condition, but the effects could be significant. The following is a brief discussion of several factors. This discussion does not purport to be comprehensive or definitive and these matters are subject to change subsequent to the date of this Remarketing Memorandum. Extensive information on the electric utility industry is available from sources in the public domain, and potential purchasers of the Bonds should obtain and review such information.

Federal Energy Legislation

Federal legislation continues to impose requirements on CPS Energy. In December 2007, the President signed the Energy Independence and Security Act ("EISA") requiring utilities to consider, for adoption, rejection, or modification by December 19, 2009, the implementation of (1) integrated resource planning; (2) rate design modifications to promote energy efficiency investments; (3) smart grid investments; and (4) smart grid information. CPS Energy has been studying technologies that would allow implementation of the standards, as modified to fit its needs and has completed the regulatory assessment as required under the Act. Municipal Utilities, such as CPS Energy, are designated as "non- regulated" under EISA, as well as the 2005 Energy Act, because those utilities are not regulated by state utility commissions.

The Energy Policy Act of 2005 ("2005 Energy Act") extended limited Federal Energy Regulatory Commission ("FERC") jurisdiction, known as "FERC-Lite", over public power entities within ERCOT such as CPS Energy that own transmission lines, and gave FERC authority to delegate certain transmission reliability standard-setting responsibilities to an Electric Reliability Organization ("ERO") and, with the ERO, establish mandatory reliability standards for operation of the nation's transmission system. CPS Energy has operated its electric system under compatible ERCOT reliability standards for many years, so CPS Energy does not anticipate any problems with FERC's reliability standards. In fact, CPS Energy's transmission owner ("TO") and distribution service provider ("DSP") units underwent an audit by the North American Electric Reliability Corporation and the Texas Regional Entity in spring 2008 and passed the audit without penalty. Its generation owner ("GO"), generation operator ("GOP"), and qualified scheduling entity ("QSE") units were audited in May 2009 and passed the audit without penalty. Finally, CPS Energy entities submitted certificates regarding their compliance with the NERC Critical Infrastructure Protection ("CIP") standards by December 31, 2009. Additional information on FERC's authority over CPS Energy can be found in "FERC Authority" herein.

The 2005 Energy Act included several provisions that could affect CPS Energy's business and continue to be evaluated by management, including:  repeal of existing Public Utility Holding Company Act of 1935 requirements;  conditional termination of the mandatory federal purchase and sale requirements for co-generation and small power production;  expansion of FERC's merger review authority;

40  re-authorization of renewable energy production incentives for solar, wind, geothermal, and biomass and authorization of new incentives for landfill gas;  incentives for development of new commercial nuclear power plants and other non- or low-carbon emitting technologies;  establishment of a 7.5% goal for increased renewable energy use by the federal government by 2013, and of a 20% required reduction in energy use by federal buildings by 2015; and  increased funding for weatherization of low-income homes and for state energy efficiency programs.

The 2005 Energy Act also included provisions affecting existing nuclear generating units, including:  extension of the Price-Anderson Act to 2025 and increases in the retrospective premiums for which licensees are liable for claims resulting from a nuclear incident;  expansion of the Nuclear Regulatory Commission ("NRC") authority to regulate decommissioning trust funds (primarily affecting funds held by former plant licensees);  direction of the U.S. Department of Energy ("DOE") to take responsibility for safe disposal of high-level radioactive waste;  procedural protections for individuals filing claims under federal whistleblower provisions;  enhanced provisions relating to NRC oversight of the security of licensed facilities; and  various decommissioning tax-related adjustments beneficial to federal tax-paying licensees.

Furthermore, the Energy Policy Act of 2005 amended the Public Utility Regulatory Policies Act of 1978 (PURPA) by adding five new standards that Municipal Utilities must consider and determine whether to implement. These new standards address net metering, diversity of fuel sources, efficiency of fossil-fuel-fired generation, time-based or "smart" metering, and the interconnection of distributed generation. CPS Energy considered the new standards and developed five modified standards that more accurately reflect local conditions and priorities. These new standards were approved by the Board on June 25, 2007.

On June 17, 2009, during the first term of the 111th Congress, the Senate Energy and Natural Resources Committee passed the American Clean Energy Leadership Act (S. 1462) which contained the first-ever federal renewable energy standard for electricity. The bill requires utilities to generate 15% of their electricity with renewable energy by 2021. The bill may be taken up by the full U.S. Senate in 2010.

The 111th Congress is considering a wide range of energy legislation measures addressing climate change policy, carbon dioxide controls, and energy independence. On June 26, 2009, the U.S. House of Representatives passed landmark energy and climate legislation. The legislation, passed as the American Clean Energy and Security Act of 2009 (H.R. 2454), requires significant reductions in stationary source greenhouse gas ("GHG") emissions through a cap-and-trade system, mandates regulation of mobile source GHG emissions, and creates a 20% efficiency and renewable electricity standard. The legislation also provides for a $190 billion investment in clean energy technology between 2012 and 2025. The Environmental Protection Agency ("EPA") estimates that, in 2005 dollars, the auctioned allowances will cost $13 per allowance in 2015, and increase to $26 or $27 per allowance by 2030. The Congressional Budget Office's estimate is slightly higher, with allowances costing $16 in 2015, and increasing to $36 by 2030. In August 2009, the EPA proposed some significant GHG rules, including a new vehicle emission standard rule, a reporting rule and an endangerment finding. On September 22, 2009, the EPA finalized the nation's first greenhouse gas reporting system/monitoring regulations which will require large emitters of heat-trapping emissions to collect GHG data. In December 2009, the EPA denied the petitions to reconsider the Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air Act. On May 12, 2010, Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) released the comprehensive climate change and clean energy bill, titled the "American Power Act". The bill included similar targets to ACES to reduce economy-wide GHG emissions from 2005 levels. See "ENVIRONMENTAL MATTERS – Federal Clean Air Act" herein. CPS Energy continues to monitor these issues closely and will be assessing the impact of proposed legislation (and rulemaking) as the session progresses.

FERC Authority

In 1992, pursuant to the Energy Policy Act of 1992 ("Energy Act"), the FERC required utilities under its jurisdiction to provide access to their electric transmission systems for interstate wholesale transactions on terms and at rates comparable to those available to the owning utility for its own use. Municipal Utilities are subject to FERC orders requiring provision of wholesale transmission service to other utilities, qualifying cogeneration facilities and independent power producers. Under FERC rules promulgated subsequent to the Energy Act, FERC further expanded open access wholesale transmission by requiring public utilities operating in interstate commerce to file open access non- discriminatory transmission tariffs. Because the interconnected ERCOT grid operates outside interstate commerce and

41 because PURA95 and SB 7, State laws discussed below, provide comparable wholesale transmission authority to the PUCT for utilities in ERCOT pursuant to which the PUCT has required open access of transmission facilities in ERCOT, the exercise of FERC authority relating to open access transmission has not been a major factor in the operation of the wholesale market in ERCOT. The 2005 Energy Act authorizes FERC to encourage and approve the voluntary formation of regional transmission organizations in order to promote fair and open access to electric transmission service and facilitate wholesale competition. See "Federal Energy Legislation" herein. The ERCOT open access system is administered by an ISO conducting many of the functions that would be administered by a Regional Transmission Organization. Section 1211 of the 2005 Energy Act amended the Federal Power Act to include a new section, designated as Section 215, which directed FERC to certify an ERO and develop procedures for establishing, approving and enforcing electric reliability standards. As discussed herein under "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - Interconnected System", FERC designated the North American Electric Reliability Corporation to serve as the ERO and to set and monitor through Regional Entities ("RE") implementation of electric reliability standards. A separate group within ERCOT was selected to serve as the RE for the ERCOT service area and CPS Energy has taken a number of steps to comply with the new electric reliability standards. Finally, on September 2, 2009, FERC executed a memorandum of agreement ("MOA") with the NRC to facilitate interactions between the NRC and the FERC on matters of mutual interest pertaining to the nation's electric power grid reliability and nuclear power plants. Matters being addressed under this MOA, which may impact developments at STP, include cyber-security requirements, reliability requirements for nuclear power plants, and grid stability issues related to nuclear plant operation. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - Interconnected System" herein. CPS Energy and the South Texas Project Nuclear Operating Company ("STPNOC") will continue to monitor and evaluate FERC developments with a potential to impact the gas and electric systems; however, it is unclear what changes, if any, will be proposed as a result of the MOA.

ERCOT

ERCOT is one of 10 Regional Reliability Councils in the North American Electric Reliability Council. The ERCOT bulk electric system is located entirely within the State and serves more than 20 million customers, representing approximately 85% of Texas' electrical load. The ERCOT service region covers more than 75%, or 200,000 square miles, of the State and contains a total of approximately 38,000 miles of transmission lines, including more than 7,000 miles at 345-kV. ERCOT only has asynchronous ties to other reliability councils, and is only connected through two direct current ("DC") ties to the eastern interconnect and three small DC ties to Mexico, providing only limited import/export capability.

In response to legislative directive, ERCOT amended its articles of incorporation to establish an ISO in 1996. Under ERCOT's organizational structure, the ISO reports to the ERCOT Board of Directors, but the PUCT has complete authority to oversee and investigate ERCOT's finances, budget, and operations as necessary to ensure that ERCOT is accountable. ISO responsibilities include security operations of the bulk system, facilitation and efficient use of the transmission system by all market participants, and coordination of regional transmission planning among transmission owning utilities and providers.

ERCOT's statutory functions include establishing and enforcing procedures relating to the reliability of the regional electrical network and accounting for the production and delivery of electricity among generators and all other market participants. The procedures are subject to PUCT oversight and review, and the PUCT chairman is an ex-officio member of the ERCOT Board. The PUCT may authorize ERCOT to charge a reasonable and competitively neutral rate to wholesale buyers and sellers to cover the independent organization's costs. Individual electric utilities own sections or components of the ERCOT transmission grid and are responsible for operating and maintaining their own transmission lines and equipment. The ISO coordinates the operation of the transmission grid to ensure its reliability, and ERCOT coordinates with the various transmission-owning electric utilities to make sure the transmission system will meet the needs of the electric market. SB 7 (described in greater detail below under "Electric Utility Restructuring in Texas; Senate Bill 7") provides that a retail electric provider, municipally-owned utility, electric cooperative, power marketer, transmission and distribution utility ("TDU"), or Power Generation Company shall observe all scheduling, operating, planning, reliability, and settlement policies, rules, guidelines and procedures established by the ISO.

Under the PUCT's transmission open access rules, each transmission service provider in ERCOT is required to provide transmission service to transmission customers in ERCOT. As compensation for this service, each transmission service provider annually recovers, through ERCOT-wide transmission charges, its Transmission Cost of Service ("TCOS"), which is set by the PUCT. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – Transmission Access and Rate Regulation" herein.

In September 2006, the PUCT selected Potomac Economics ("Potomac"), an energy consulting firm, to serve as the independent market monitor ("IMM") for ERCOT, a function that was legislated at the request of the PUCT by the 2005 Texas Legislature. The IMM has the authority to conduct monitoring, analysis and reporting activities but has no 42 enforcement authority. A PUCT rule provides that the IMM shall report directly to the PUCT any potential market manipulations, including market power abuse, and any violations of PUCT rules or ERCOT protocols.

The PUCT rule establishes the IMM as an office independent from ERCOT, which is not subject to the supervision of ERCOT with respect to its monitoring and investigative activities. ERCOT funds the operations of the IMM, but the budget and expenditures of the IMM are subject to PUCT supervision and oversight. The ethical standards governing the IMM director and staff are intended to prevent conflicts of interest between the IMM and a market participant or an affiliate of a market participant. The rule took effect in April 2006.

Among other activities undertaken by the IMM was an investigation into relative shortages of energy in the balancing energy market, which is used by ERCOT to ensure that supply and demand match at all times, and usually comprises around 5% of the energy used in the market. Potomac concluded that a significant amount of available energy that could have been offered into the balancing energy market was not, because of barriers and economic risks inherent in the balancing energy market, rather than physical or economic withholding. Potomac's report expressed the view that such inefficiencies will be addressed when ERCOT implements a nodal market (as opposed to the current "zonal" market) design for the wholesale market, currently projected for 2010 (as described below under "Post Senate Bill 7 Wholesale Market Design Developments"), which will result in better utilization of these resources through pricing of power at the point where generators deliver power to the electric network and through a day-ahead market. In the end, Potomac's report concludes that there is little evidence that "the large amount of unoffered capacity represents strategic withholding".

Electric Utility Restructuring in Texas; Senate Bill 7

During the 1999 legislative session, the Texas Legislature enacted SB 7, providing for retail electric open competition. This began on January 1, 2002. SB 7 continues Texas electric transmission wholesale open access, which came into effect in 1997 and requires all transmission system owners to make their transmission systems available for use by others at prices and on terms comparable to each respective owner's use of its system for its own wholesale transactions. SB 7 also fundamentally redefined and restructured the Texas electric industry. The following discussion of SB 7 applies primarily to ERCOT.

SB 7 includes provisions that apply directly to Municipal Utilities, such as CPS Energy, as well as other provisions that govern IOUs and electric co-operatives ("Electric Co-ops"). As of January 1, 2002, SB 7 allows retail customers of IOUs to choose their electric energy suppliers. SB 7 also allows retail customers of those Municipal Utilities and Electric Co- ops that elect to opt-in, on or after that date, to choose their electric energy suppliers. Provisions of SB 7 that apply to the CPS Energy electric system, as well as provisions that apply only to IOUs and Electric Co-ops, are described below, the latter for the purpose of providing information concerning the overall restructured electric utility market in which CPS Energy and the City could choose to directly participate in the future.

SB 7 required IOUs to separate their retail energy service activities from regulated utility activities by September 1, 2000, and to unbundle their generation, transmission/distribution and retail electric sales functions into separate units by January 1, 2002. An IOU may choose to sell one or more of its lines of business to independent entities, or it may create separate but affiliated companies and possibly operating divisions. If so, these new entities may be owned by a common holding company, but each must operate largely independent of the others. The services offered by such separate entities must be available to other parties on non-discriminatory bases. Municipal Utilities and Electric Co-ops which open their service territories ("opt-in") to retail electric competition are not required to, but may, unbundle their electric system components. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – Service Area" herein.

Entities that have Opted-in to Competition

The following discussion relates to entities that are currently in electric competition in Texas, and does not apply to CPS Energy, but could apply if CPS Energy and the City opt-in to electric competition. Generation assets of IOUs are owned by Power Generation Companies, which must register with the PUCT and must comply with certain rules that are intended to protect consumers, but they otherwise are unregulated and may sell electricity at market prices. IOU owners of TDUs are fully regulated by the PUCT. Retail sales activities are performed by Retail Electric Providers ("REPs") which are the only entities authorized to sell electricity to retail customers (other than Municipal Utilities and Electric Co- ops within their service areas, or, if they have adopted retail competition, also outside their service areas). REPs must register with the PUCT, demonstrate financial capabilities and comply with certain consumer protection requirements. REPs buy electricity from Power Generation Companies, power marketers, and/or other parties and may resell that electricity to retail customers at any location in Texas (other than within service areas of Municipal Utilities and Electric 43 Co-ops that have not opened their service areas to retail competition). TDUs, Municipal Utilities, and Electric Co-ops that have chosen to participate in competition are obligated to deliver electricity to retail customers and are also required to transport electricity to wholesale buyers. The PUCT is required to approve the construction of TDUs' new transmission facilities and may order the construction of new facilities in Texas in order to relieve transmission congestion. TDUs are required to provide access to both their transmission and distribution systems on a non- discriminatory basis to all eligible customers. Retail rates for the use of distribution systems of Municipal Utilities and Electric Co-ops are exclusively within the jurisdiction of these entities' governing bodies rather than that of the PUCT.

SB 7 also provides a number of consumer protection provisions. Each service area within Texas that participates in retail competition has a designated Provider of Last Resort; those Providers of Last Resort serving in former service areas of IOUs are selected and approved by the PUCT. The Provider of Last Resort is a REP that must offer to sell electricity to any retail customer in its designated area at a standard rate approved by the PUCT. The Provider of Last Resort must also serve any customer whose REP has failed to provide service. Each Municipal Utility and Electric Co-op that opts-in to retail competition may designate itself or another qualified entity as the Provider of Last Resort for its service territory. In such cases, the respective Municipal Utility or Electric Co-op, not the PUCT, will set the electric rates for such respective Provider of Last Resort.

Under SB 7, IOUs may recover a portion of their "stranded costs" (the net book value of certain "non-economic" assets less market value and certain "above market" purchased-power costs) and "regulatory assets", which is intended to permit recovery of the difference between the amount necessary to pay for the assets required under prior electric regulation and the amount that can be collected through market-based rates in the open competition market. SB 7 establishes the procedure to determine the amount of IOU stranded costs and regulatory assets. The PUCT has determined the stranded costs, which have been and will be collected through a non-bypassable competitive transition charge collected from the end retail electric users within the IOU's service territory as it existed on May 1, 1999. The charge is collected primarily as an additional component to the rate for the use of the retail electric distribution system delivering electricity to such end user.

IOUs may recover a certain portion of their respective stranded costs through the issuance of bonds, with a maturity not to exceed 15 years, whereby the principal, interest and reasonable costs of issuing, servicing and refinancing such bonds is secured by a qualified rate order of the PUCT that creates the "competitive transition charge". Neither the State nor the PUCT may amend the qualified rate order in any manner that would impair the rights of the "securitized" bondholders.

Additional Impacts of Senate Bill 7

Municipal Utilities and Electric Co-ops are largely exempt from the requirements of SB 7 that apply to IOUs. While IOUs became subject to retail competition beginning on January 1, 2002, the governing bodies of Municipal Utilities and Electric Co-ops have the sole discretion to determine whether and when to opt-in to retail competition. However, if a Municipal Utility or Electric Co-op has not voted to opt-in, it will not be able to compete for retail energy customers at unregulated rates outside its traditional electric service area or territory.

SB 7 preserves the PUCT's regulatory authority over electric transmission facilities and open access to such transmission facilities. SB 7 provides for an independent transmission system operator (an ISO as previously defined) that is governed by a board comprised of market participants and independent members and is responsible for directing and controlling the operation of the transmission network within ERCOT. The PUCT has designated ERCOT as the ISO for the portion of Texas within the ERCOT area. In addition, SB 7 (as amended by the Texas Legislature after 1999) directs the PUCT to determine electric wholesale transmission open access rates on a 100% "postage stamp" pricing methodology.

The greatest potential impact on CPS Energy's electric system from SB 7 could result from a decision by the Board and the City Council to participate in a fully competitive market, particularly in light of the fact that CPS Energy is among the lowest cost producers of electric energy in Texas. On April 26, 2001, the City Council passed a resolution stating that the City did not intend to opt-in to the deregulated electric market beginning January 1, 2002. However, CPS Energy currently believes that it is taking all steps necessary to prepare for possible competition in the unregulated energy market, should the Board and the City Council make a decision to opt-in, or future legislation forces Municipal Utilities and Electric Co-ops into retail competition.

44 Any future decision of the Board and the City Council to participate in full retail competition would permit CPS Energy to offer electric energy service to customers located in areas participating in retail choice that are not presently within the certificated service area of CPS Energy. The Board and the City Council could likewise choose to open the CPS Energy service area to competition from other suppliers while choosing not to have CPS Energy compete for retail customers outside its certified service area.

As discussed above, Municipal Utilities and Electric Co-ops will also determine the rates for use of their distribution systems after they open their territories to retail competition, although the PUCT has established by rule the terms and conditions applicable to have access to those systems. SB 7 also permits Municipal Utilities and Electric Co-ops to recover their stranded costs through collection of a non-bypassable transition charge from their customers if so determined by such entities through procedures that have the effect of procedures available to IOUs under SB 7. Unlike IOUs, the governing body of a Municipal Utility determines the amount of stranded costs to be recovered pursuant to rules and procedures established by such governing body. Municipal Utilities and Electric Co-ops are also permitted to recover their respective stranded costs through the issuance of bonds in a similar fashion to the IOUs. Any decision by CPS Energy as to the magnitude of its stranded costs, if any, would be made in conjunction with the decision as to whether or not to participate in retail competition.

A Municipal Utility that decides to participate in retail competition and to compete for retail customers outside its traditional service area will be subject to a PUCT-approved code of conduct governing affiliate relationships and anti- competitive practices. The PUCT has established by a standard rule the terms and conditions, but has no jurisdiction over the rates, for open access by other suppliers to the distribution facilities of Municipal Utilities electing to compete in the retail market. If a Municipal Utility decides to participate in retail competition, its customers are subject to being charged a PUCT-approved System Benefit Fund fee per megawatt hour beginning six months prior to implementation of customer choice. The fee is a contribution to a statewide fund targeted at property tax replacement, low-income assistance programs and customer education.

Among other provisions, SB 7 provides that nothing in that act or in any rule adopted under it may impair any contracts, covenants that act may impair the tax-exempt status of municipalities or compel them to use facilities in a manner that violates any bond covenants, or obligations between municipalities and bondholders of revenue bonds issued by municipalities and that nothing in or other exemption of interest or tax-exempt status. The bill also improves the competitive position of Municipal Utilities by allowing local governing bodies, whether or not they implement retail choice, to adopt alternative procurement processes under which less restrictive competitive bidding requirements can apply and to implement more liberal policies for the sale and exchange of real estate. Also, matters affecting the competitiveness of Municipal Utilities are made exempt from disclosure under the open meetings and open records acts and the right of Municipal Utilities to enter into risk management and hedging contracts for fuel and energy is clarified. See "FUEL SUPPLY", "WHOLESALE POWER MARKETING" and "ENTERPRISE RISK MANAGEMENT" herein for discussion of the Energy Price Risk Management Program in use at CPS Energy.

During its 79th Legislative Session in 2005, the Texas Legislature reviewed the mission and performance of the PUCT, as required by the Texas Sunset Act. This act provides that the Sunset Commission, composed of legislators and public members, periodically evaluate a state agency to determine if the agency is still needed, and what improvements are needed to ensure that tax dollars are appropriately utilized. Based on recommendations of the Sunset Commission, the Texas Legislature ultimately decides whether an agency continues to operate into the future.

The 79th Legislature in its review of the PUCT, reauthorized the agency until 2011. Reforms were enacted to increase the accountability of ERCOT, including added regulatory scrutiny and governance changes that add independence while preserving input from industry experts. An "independent market monitor" selected by and reporting to the PUCT, was institutionalized to help guard against manipulation in the Texas wholesale electric market. No significant, direct impact on CPS Energy is anticipated as a result of this legislation.

Post Senate Bill 7 Wholesale Market Design Developments

In the summer of 2003, the PUCT adopted rules requiring that ERCOT transition from a zonal to a nodal wholesale market and requiring that new protocols to accomplish this transition be submitted to the PUCT for review. Implementation of the nodal market will include, among other elements: direct assignment of the costs of local transmission congestion to market participants that cause the congestion; implementation of an integrated, financially binding day-ahead market; and nodal energy prices for resources and zonal energy prices for loads. Consistent with the rule, ERCOT and industry stakeholders have developed and submitted to the PUCT protocols and proposed energy load zones to implement these market design elements, together with an independent cost-benefit analysis (which indicated that the conversion would cost approximately $260 million, while yielding approximately $6 billion in benefits). The 45 PUCT in 2005 reaffirmed its intent to implement the nodal market in ERCOT. In December 2005, the PUCT conducted a hearing on the nodal protocols submitted by ERCOT, and in April 2006 it issued an order approving the implementation of the nodal market. ERCOT has completed its process of design specification and is currently in the implementation phase of its nodal systems. Market participants, including CPS Energy, are also in the implementation phase for the upgrade of their systems necessary to operate in accordance with the nodal market protocols. Three municipalities have appealed approval of the protocols to the Travis County District Court, but the appeal has been abated because of the hereinafter described delay of the launch of the nodal market.

Since the PUCT's action requiring the conversion, the transition by ERCOT from a zonal to a nodal wholesale market has experienced delays and increased cost projections. The original effective date of conversion (October 1, 2006) has twice been delayed (first to the end of 2008/beginning of 2009 and, most recently (as announced on November 26, 2008), to December 1, 2010), and the anticipated cost has increased from approximately $260 million to $660 million. To accommodate this projected cost increase, ERCOT petitioned the PUCT on March 31, 2009, for an increase in the nodal surcharge assessed to energy generators. On September 24, 2009, the PUCT approved a Non-Unanimous Stipulation that requires the $0.169 interim nodal surcharge approved by the Commission to continue through December 31, 2009, and imposed a revised nodal surcharge of $0.375 per megawatt-hour beginning January 1, 2010. Signatories to the Stipulation Agreement also agreed not to contest the allocation of the nodal surcharge to generators as previously approved by the Commission. These fees are directly applied to customer bills as they become effective. See "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – Transmission Access and Rate Regulation" herein.

These delays and cost increases have drawn criticism from certain Texas legislators, as well as from energy generators that will fund this conversion through payment of the increased nodal surcharge described above. The new cost/benefit analysis for this conversion, delivered in mid-December 2008, found the benefits of the nodal market still outweighed not completing the conversion.

Environmental Restrictions of Senate Bill 7 and Other Related Regulations

SB 7 contains specified emissions reduction requirements for certain older electric generating units, which would otherwise be exempt from the Texas Commission on Environmental Quality ("TCEQ") permitting program by virtue of "grandfathered" status. Under SB 7, annual emissions of nitrogen oxides ("NOx") from such units were reduced by 50% from 1997 levels, beginning May 1, 2003. These emissions have been reported on a yearly basis and CPS Energy has met the requirements of its NOx cap for the applicable units for the past three compliance years. CPS Energy has final Electric Generating Facility ("EGF") State permits from the TCEQ for its four older electric generating plant sites, comprising 11 gas-fired units. CPS Energy may require future additional expenditures for emission control technology. See "ENVIRONMENTAL MATTERS – Federal Clean Air Act" and "CONSTRUCTION PROGRAM" herein for discussion of the cumulative economic effect of these requirements together with requirements under Federal Clean Air Act permits.

Although SB 7 instituted many of the changes to environmental emission controls which affect grandfathered electric generating plants, another TCEQ regulation, Chapter 117, is directed at all units in the state, including CPS Energy's coal plants. These regulations required a 50% reduction in NOx emissions statewide beginning May 1, 2005, and system-wide on an annual basis. The first reporting period for CPS Energy's power plants subject to the Chapter 117 cap was for the compliance period May 1, 2005 to April 2006. CPS Energy has met the Chapter 117 cap for each compliance period. As a result of the J.K. Spruce Plant Unit 2 ("JKS 2") air permitting process, CPS Energy has committed to tighter NOx emission limitations than what is required under Chapter 117 at the Calaveras Power Station once the JKS 2 unit comes on line. The final Clean Air Interstate Rule ("CAIR") has imposed even more NOx restrictions on CPS Energy power plants as described in "ENVIRONMENTAL MATTERS" herein. Changes to environmental emission controls may have the greatest effect on coal plants. See "ENVIRONMENTAL MATTERS – Federal Clean Air Act" herein. Further statutory changes and additional regulations may change existing cost assumptions for electric utilities. Such changes could have a material impact on the cost of power generated at affected electric generating units.

SB 7 established the State's goal for renewable energy in 1999 but made no special provisions for transmission to interconnect renewable resources. The rapid development of wind power in west Texas since 2001 has shown that wind farms can be built more quickly than traditional transmission facilities. This timing difference poses a dilemma for planning as it is difficult to know whether a new line will be needed if the generation facilities do not yet exist. A wind farm is difficult to finance if there is no certainty that sufficient transmission will be available to deliver generated electricity. Senate Bill 20, enacted by the Texas Legislature in 2005 ("SB 20"), authorized the PUCT to regulate in this area, and specifically authorized the PUCT to identify an area with sufficient renewable energy potential, known as competitive renewable energy zones ("CREZs") and pre-designate the need for transmission facilities serving the area even if no specific renewable generation projects exist or are under construction. The designation of CREZs in regions 46 with developable renewable resources would be partially based on financial commitments of wind project developers desirous of building in the CREZ. In July 2008, the PUCT voted to create five CREZs in west Texas and the Panhandle. In August 2008 the PUCT further decided that an additional 18,456 MW of wind energy from the five CREZs would be delivered into ERCOT via transmission lines estimated to cost ERCOT rate payers a minimum of $4.93 billion. The PUCT awarded the construction of those transmission lines to existing transmission service providers ("TSPs") in whose service areas the lines will be located and new entrants seeking to become TSPs. The PUCT's decision was appealed by the City of Garland, and a State District Court has determined that the PUCT should have given municipally owned utilities consideration in the CREZ award process. The PUCT reconsidered and awarded a CREZ line for the City of Garland to construct. CPS Energy does not plan to renew its request for authority to construct any part of the CREZ lines. Under the statewide transmission costs allocation process, CPS Energy will pay approximately 7% of these construction costs.

According to ERCOT, about 8.3% of the electricity generated in Texas during the first half of 2010 came from renewable energy resources, up from 6.4% for all of 2009. The total capacity of renewable facilities in Texas as of June 30, 2010, is approximately 10,073.5 MW which exceeds the 5,000 MW goal specified in the Public Utility Commission of Texas Substantive Rule 25.173 – Goal for Renewable Energy and it exceeds the January 1, 2025 "target" of 10,000 MW wind generation. At 10:58 pm on June 12, 2010, wind generation in ERCOT produced a new record of 7,016 MW, which represented 15.8% of the system load at that time. The previous record was 6,272 MW on March 5, 2010, which represented 19% of the load at that time.

On February 26, 2008, ERCOT implemented the second stage of its emergency grid procedures (out of 4 stages) following a sudden drop in the system frequency. The drop in system frequency was attributed to a combination of events including a drop in wind energy production at the same time the evening electricity load was increasing, accompanied by multiple power providers, other than CPS Energy, falling below their scheduled energy production. The loss of wind energy also resulted in congestion in certain parts of the ERCOT transmission system. Implementing the stage two emergency procedures stabilized ERCOT system frequency. Other than interruptible loads, no other customers in the ERCOT region lost power due to the event. Because of the challenges associated with scheduling wind energy, ERCOT has chosen to count only 8.6% of nameplate wind capacity toward ERCOT's reserve margin requirements.

The Legislature increased the State's renewable energy goal in 2005 with the enactment of SB 20. As amended by SB 20, PURA directs that the cumulative installed renewable capacity in the State must total 2,280 MW by January 1, 2007; 3,272 MW by January 1, 2009; 4,264 MW by January 1, 2011; 5,256 MW by January 1, 2013; and 5,880 MW by January 1, 2015. Further, the PUCT is directed to establish a target of 10,000 MW by January 1, 2025. The legislation includes a target of 500 MW from renewable resources other than wind power. In addition, SB 20 requires the PUCT to designate CREZs to expedite transmission planning. In addition, on April 2, 2008, ERCOT filed a report with the PUCT concerning wind power and the transmission facilities that may be necessary to transfer the electric power across the State. No actions taken during the 81st Session of the Texas Legislature, which adjourned on June 1, 2009, in this regard impact CPS Energy.

Looking to the future, CPS Energy plans to evolve from a company focused on providing low-cost power from traditional generation sources to a company providing competitively priced power from a variety of sustainable sources. CPS Energy will continue to focus on high levels of reliability to the communities it serves, while working on customer retention and loyalty.

RESPONSE TO COMPETITION

In order to prepare to operate successfully in the new competitive environment created by the enactment of SB 7, CPS Energy developed a marketing plan that focuses on retaining the retail customers in its historic service areas and active participation in wholesale markets. Programs concentrate on not only meeting all customers' traditional needs, but also on providing products and services that provide comfort and convenience for residential customers and improve productivity and reduce costs for commercial and industrial customers. In addition, CPS Energy is improving internal and external communications, promoting participation in a wide variety of community initiatives, staying actively involved with regulatory issues, and focusing on the strategies and objectives at the corporate and business unit levels which have been identified as critical to success.

As a step in diversifying its energy resource plan, CPS Energy is aggressively pursuing renewable energy supplies. CPS Energy is currently receiving renewable energy under several long-term contracts. CPS Energy has a 20-year contract for 160.5 MW of wind-generated electricity from the Desert Sky Wind Project; a 20-year contract for 100.5 MW from the Cottonwood Creek Wind Farm; a 20-year contract for 240.8 MW from an expansion to the Cottonwood Creek Wind Farm; a 15-year contract for 76.8 MW from the Penascal Wind Farm and a 15 year contract for 130.4 MW from the Papalote Creek Wind Farm. CPS Energy also has a landfill gas-generated energy project totaling 9.6 MW which came 47 on-line in December 2005. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System – Generating Plants" herein.

To date CPS Energy's renewable energy capacity totals more than 718.6 MW in service with another 191.4 MW under contract. CPS Energy has one of the most aggressive renewable energy programs in Texas with a renewable capacity under contract equivalent to nearly 19.6% of its historic peak power requirement. For discussion of the reliability of wind-powered generation, see "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY - Environmental Restrictions of Senate Bill 7 and Other Related Regulations" herein.

With respect to state and national legislative action regarding competition, CPS Energy continues to participate actively in the legislative process to voice the interests of Municipal Utilities and play an integral part in shaping the new environment in which it will operate. CPS Energy continues to evaluate the price components of the energy services it provides, recognizing that the price for electricity will be a paramount factor for succeeding in a deregulated environment. Cost containment initiatives coupled with additional phases of debt management strategies will continue in the years ahead.

In conjunction with the onset of deregulation and retail competition, overall merchant plant activity in ERCOT increased significantly in recent years, with more than 48,705 MW of new generation completed since wholesale competition was introduced in September 1995. The result of these capacity additions has been a strong downward pressure on wholesale power prices that, in turn, has led several companies to decommission or "mothball" less efficient power plants. According to information posted at the PUCT website, as of December 28, 2009, 8 ERCOT facilities (2,718 MW) were mothballed since September 1995, and 38 such facilities have been retired (9,824 MW) since 2002. CPS Energy was a net seller of power when excess capacity was available. The market is constantly monitored, and CPS Energy continues to purchase or sell on a daily basis to optimize use of its generation portfolio.

Strategic Planning Initiatives

CPS Energy has a comprehensive corporate strategic plan that is designed to make CPS Energy more efficient and competitive, while delivering value to its various customer groups and the City. On August 22, 2005, the Board approved a new strategic plan, developed by a cross-functional team. The plan built on the CPS Energy mission, vision, and core values, as well as long-term goals adopted in 2004, as part of the strategic process. The strategic plan has evolved to include components for the wholesale; retail; transmission and distribution; gas; and shared services business units/areas. Each plan is the responsibility of the business unit and will focus on Customer Relationships; Employee Relationships; External Relationships; Operational Excellence; Renewables; Carbon Constraints and the Environment; Technology & Innovation; Financial Integrity. The senior executive team has accountability for development and delivery of corporate strategy and the related plans. The Board reviews and approves the corporate strategy each year.

Major initiatives and key action plans necessary to accomplish the corporate objectives and meet or exceed the targets are also included in each plan. Status reports on strategies, risks and market changes are provided to the Board and senior management on a regular basis. An oversight team, appointed by senior management, ensures consistency with the corporate vision and directs the resolution of cross-business unit issues. Vision 2020 was completed in 2008, outlining CPS Energy's long term view, focused on the key business drivers for the coming decade: customer relationships, employee relationships, external relationships, carbon constraints and the environment, technology and innovation, and financial integrity. In furtherance of Vision 2020, CPS Energy and the City hosted a Sustainability Workshop in April 2009. CPS Energy continues to work with City and community leaders in the development of sustainability initiatives to improve the overall quality of life in San Antonio. CPS Energy periodically updates Vision 2020 to ensure it properly reflects CPS Energy's perspective and direction.

Debt and Asset Management Program

CPS Energy has developed a debt and asset management program ("Debt Management Program") for the purposes of lowering the debt component of energy costs, maximizing the effective use of cash and cash equivalent assets and enhancing financial flexibility. An important part of the Debt Management Program is debt restructuring through the prudent employment of variable rate debt. CPS Energy does not currently use interest rate swaps, but continues to assess them as possibilities for the future. The program also focuses on the use of unencumbered cash and available cash flow, when available, to redeem debt ahead of scheduled maturities as a means of reducing outstanding debt. The Debt Management Program is designed to lower interest costs, fund strategic initiatives and increase net cash flow. CPS Energy has a Debt Management Policy ("Policy"), providing guidelines under which financing and debt transactions are managed. These guidelines focus on financial options intended to lower debt service costs on outstanding debt;

48 facilitate alternative financing methods to capitalize on the present market conditions and optimize capital structure; and maintain favorable financial ratios. Under these guidelines, CPS Energy's gross variable rate exposure is limited to 25% of total outstanding debt.

Current Economic Developments

CPS Energy works independently as well as with local economic development agencies to recruit, retain and encourage the expansion of targeted businesses throughout the service territory. Strategic initiatives include the pro-active recruitment, retention and expansion of the following industries which have the most potential advantage to CPS Energy: advanced manufacturing (including aviation, aerospace, automotive), life sciences/bio-medical, homeland security, information technology (including data centers, financial service centers, insurance and back office operations) and large- scale retail developments.

Even in a recessionary national economy, San Antonio continues to systematically grow its economy, as indicated by recent publications naming San Antonio as one of the nation's best performing and strongest metro areas during the recent recession (Brookings Institute, Business Week, Forbes).

The City has solidified its position nationally as a location for companies with mission critical information technology, information security and data storage requirements. Microsoft, the 24th Air Force (Cyber Command), Affiliated Computer Services ("ACS"), Lowe's Home Improvement, Valero Energy, Christus Healthcare, Frost Bank, Rackspace Managed Hosting, Power Loft, the Texas Cryptologic Center, Corporate Office Properties Trust – all have decided to locate data centers in San Antonio, the seventh-largest city in the United States. All cite CPS Energy, the nation's largest municipally owned energy company providing electric and natural gas service, as one of the primary reasons for those decisions.

Over the past year and one-half, San Antonio has been successful in recruiting 16 new or expanding companies into the CPS Energy service territory with the potential to create almost 7,000 new jobs, including:

 Medtronic Diabetes National Sales and Operations Headquarters will serve as the company's diabetes therapy management and education center. This new 150,000 square foot facility has created 1,400 new jobs;  Nationwide Mutual Insurance Company based in Columbus, Ohio will create 838 jobs in San Antonio at a new regional corporate campus;  Transcom North America, Canada's largest privately-held provider of customer relationship and contract center services will create 1,400 jobs;  Toyota Motor Corporation's decision to move its Tacoma truck production to San Antonio will create 850 new jobs anticipated by the end of 2010;  Allstate Corp. plans to open a customer information center in San Antonio that will employ 600 full-time employees;  Kohl's has opened a regional operations center for the credit card program and will employ 1,065;  Atento will employ 400 in its new back office contact center; and  BD (Becton, Dickinson Company), a leading global medical technology company, will open a professional services headquarters creating 296 jobs.

New business development is achieved in partnership with the San Antonio Economic Development Foundation and results in development throughout the CPS Energy service territory. For example, the Cole Hersee Company, a manufacturer and distributor of electrical switches, recently located to the City of Schertz adding 30 new jobs.

Work continues on the Texas Cryptologic Center ("TCC") in San Antonio. The TCC has committed to establish a regional cryptology center to support its communications intelligence – and is projected to retain and create almost 2,000 jobs over the next few years. At full build-out, in 2014, this center will result in an additional load of over 60 MW onto the CPS Energy system. This operation has already been the catalyst for the development of a new office park surrounding the TCC site as two buildings are currently under construction.

In addition, progress continues on other major projects such as the United States Department of Defense's Base Realignment and Closure ("BRAC") program.

The San Antonio economy is faring better than the majority of the remainder of the nation. The unemployment rate in San Antonio is 7.7% and is lower than the state and national rate of 8.5% and 9.7% respectively. San Antonio is expecting job growth of 2%-2.5% for 2010. Although Bexar County has experienced a decrease in the number of

49 residential housing permits, the 12-month moving average remains positive. As a result, CPS Energy is not predicting net customer losses as a result of the current economic slow-down.

CONSTRUCTION PROGRAM

Comprehensive programs for planning and construction to meet current and future electric and gas systems needs are continually being reviewed and updated, and are aligned with the strategic plan. CPS Energy utilizes computer-based mathematical models for its forecasting processes. CPS Energy bases its near-term construction and operating needs on a five-year forecast. This short-term annual forecast is supported by a 35-year electric resource plan and is integrated in the long-term financial plan. These assumptions are subject to substantial change and are revised as necessary to maintain CPS Energy's competitive position.

While short-term energy demand projections have been impacted by recent economic developments and while energy efficiency and conservation is expected to reduce usage through the STEP, positive customer growth is still expected. CPS Energy expects to see continued growth in its customer base for the electric and gas systems due to projected population growth in the San Antonio area. The current energy sales and peak demand forecast predicts annual increases in sales over the next 25 years of 1.64% and 0.04% in electric and gas sales, respectively, and an average peak demand growth rate over the next 25 years of 1.28% per year. CPS Energy has continued to expand its electric customer extensions, with ongoing construction growth in this area. The capital projects in fiscal year 2010-11 are planned to be funded with transfers from internally generated funds, debt proceeds, and other sources.

A capital improvement plan is made for planning purposes and may identify projects that may be deferred or omitted entirely in future years. In addition, the proposed funding sources for the plan may be modified to meet changing conditions. Likewise, as conditions change, new projects may be added that are not currently identified. CPS Energy continually monitors and updates the capital plan with estimates of expenditures necessary to meet proposed and probable new envireonmental regulations and regulatory standards. CPS Energy's current $3.006 billion, five-year capital improvement plan is forecasted from February 1, 2010 to January 31, 2015, and does not include expenditure for further development of CPS Energy's existing 7.625% interest in STP Units 3 and 4.

Construction projects include electric transmission, electric generation, electric distribution, general properties, and gas facilities. See also "DESCRIPTION OF PHYSICAL PROPERTY – Electric System" herein. The capital program is primarily driven by the generation function and includes expenditures for completing JKS 2 and additional gas peaking generation, various environmental and production upgrades at existing plants, and CPS Energy's 40% share of STP Units 1 and 2. The remainder of the capital budget is for electric distribution, electric transmission, gas distribution, and shared services including the deployment of Advanced Metering Infrastructure technology.

Over the five-year period covered by the current capital plan, construction funding from debt proceeds averages approximately $419.9 million per year, with other significant sources of funding for the plan consisting of internally generated funds.

The Community Infrastructure and Economic Development Fund ("CIED") was established by Board policy on January 19, 2005, as a successor to the Overhead Conversion Fund ("OCF"). The OCF was originally instituted in 1993 by the Board in response to interest by the citizens and governing bodies of the City and the suburban cities within the CPS Energy service area to enhance the aesthetic appeal of the public areas by minimizing the visual impact of overhead electric facilities. The OCF amount, set annually, equaled 1% of the electric revenue (less uncollectibles) of the CPS Energy electric system billed during the previous fiscal year to retail electric customers of CPS Energy residing within the City and each of the suburban cities. For several reasons, including the high cost of converting overhead facilities to underground, the City and the suburban cities had difficulty spending the OCF monies on an annual basis. In late 2004, CPS Energy was asked to consider expanding the potential uses of the fund. This request was later approved by the Board.

Going forward, CPS Energy will continue to make all or any part of the monies available for "traditional" OCF projects (re-routing or undergrounding), but will also make the funds available for certain eligible economic development and environmental stewardship/energy efficiency projects. Such projects are evaluated for their ability to improve the environment, create new jobs, and generate new electric and gas revenues. Both of these new allowable uses (economic development and environmental stewardship) require a positive cost-benefit evaluation, meaning that CPS Energy is likely to receive greater economic return as a result of the project being eligible to receive CIED Fund monies and other investments applied toward the project. The CIED Fund allocable to all the beneficiary entities as of July 31, 2010, totaled over $51 million.

50 By further policy change effective January 2006, and by City ordinance passed in February 2006, CPS Energy agreed to transfer monies allocable to the City under the CIED Fund Policy to that entity's General Fund. The transfer is subject to the limitations that the: (1) total annual City transfer from the gross revenue of the Systems, inclusive of the CIED fund transfers, does not exceed 14% of CPS Energy's total gross revenues (in compliance with the Bond Ordinances), and (2) CIED fund transfer does not exceed 1% of electric base rates paid by residents of the City. Using a portion of the CIED fund's beginning balance on March 30, 2009, the City sought and obtained consent from CPS Energy for a one-time transfer of previously collected CIED funds allocable to the City in excess of the 1% of electric base rates paid by residents of the City in the prior year. The City stated the intended uses for these funds were to support BRAC-related improvements in the Fort Sam Houston area and other City infrastructure improvements. (See "RESPONSE TO COMPETITION – Current Economic Developments" herein). This special transfer complied with all the Bond Ordinances in that it did not result in transfers in excess of 14% of CPS Energy's total gross revenues.

DESCRIPTION OF PHYSICAL PROPERTY

ELECTRIC SYSTEM

Generating Plants

CPS Energy currently operates 16 non-nuclear electric generating units, four of which are coal-fired and 12 of which are gas-fired. This excludes three gas steam units in "mothball" status that could be brought back into operation if needed. Some of the gas-fired generating units may also burn fuel oil, which provides greater fuel flexibility and reliability. CPS Energy also owns a 40% interest in the South Texas Project's ("STP") two existing nuclear generating Units 1 and 2. These nuclear units supplied 34.6% of the electric system native load for the six months ending July 31, 2010. See "South Texas Project" herein.

The J.T. Deely, J.K. Spruce, and O.W. Sommers Plants are located at the Calaveras Power Station southeast of the City and share Calaveras Lake's cooling capacity. The J.T. Deely Plant consists of two units that are equipped to burn coal. Like the Deely Plant units, the J.K. Spruce Plant consists of two units, including the J.K. Spruce Unit 2 ("JKS 2") that was provisionally commissioned on May 28, 2010. All CPS Energy's coal units burn low sulfur western coal from the Powder River Basin area of Wyoming. Prior to completion of JKS2, coal units provided 44.4% of the electric system native load for the six months ending July 31, 2010. The O.W. Sommers Plant comprises two units, which are capable of operating on either natural gas or fuel oil. CPS Energy entered into a financial lease/leaseback transaction with an affiliate of Unicom Corporation involving CPS Energy's J.K. Spruce Unit 1 ("JKS 1") in June 2000. Unicom Corporation has subsequently merged into Exelon Corporation. The balance sheets and related notes in Appendix B include items related to this transaction.

CPS Energy owns 1,274 aluminum railroad cars which are used in unit trains to haul coal from mines in Wyoming and other locations to the J.T. Deely Plant and the J.K. Spruce Plant. CPS Energy performs its own railroad car maintenance and servicing at its railroad car maintenance facility located at Calaveras Power Station. Also, CPS Energy is currently leasing an additional 567 aluminum rail cars to meet the increased coal demand due to the commercial operation of JKS 2.

The V.H. Braunig Plant is located on the Braunig Power Station, also southeast of the City. It has three units that can operate on either natural gas or fuel oil. The Arthur von Rosenberg Plant, located adjacent to the Braunig Power Station, uses combined cycle technology that is 25 to 30% more fuel efficient than other gas generation technologies.

While STP and the plants at the Calaveras Power Station and Braunig Power Station now provide most of CPS Energy's generation, CPS Energy has two other sites with power generation assets. Leon Creek Power Station located in southwest San Antonio has two older gas steam units and four natural gas simple cycle combustion turbines that were installed in 2004. The combustion turbines provide quick-start peaking energy for CPS Energy’s generation portfolio, as well as black start service to the grid operator, ERCOT. Finally, the Tuttle Power Station located in northeast San Antonio has four older gas steam units with Unit 2 retired from service in January 2007 and Units 1, 3, and 4 currently in mothball status. See "Generating Capability" table below for more details on CPS Energy generating units.

Authorization to proceed with the permit application for JKS 2, a new 750 MW coal-fired generating station co-located with the JKS 1 coal-fired generating station, was received from the Board in June 2003. In November 2003, CPS Energy filed with TCEQ an application for permits associated with construction and operation of JKS 2. The TCEQ approved the permit in December 2005. The ground breaking for the new coal-fired unit took place on March 21, 2006. The plant was placed into service on May 28, 2010. JKS 2 incorporates the most advanced emissions controls including a wet SO2 scrubber, selective catalytic reduction ("SCR") technology, and baghouse. See "ENVIRONMENTAL MATTERS – Other Environmental Issues" herein for further discussion. 51 CPS Energy is adding four natural gas/fuel oil simple cycle combustion turbines, rated at 47.5 MW each, to the V.H. Braunig Plant site. The new units are scheduled to come on line by the end of 2010 and will include blackstart capability. To conserve Edwards Aquifer ground water, the new units will use "once through" cooling water from Braunig Lake to reject heat from the inlet chilling system. This will add very little heat load to the lake.

Braunig and Calaveras Lakes are CPS Energy-owned man-made lakes that provide cooling for the majority of CPS Energy's generating units. These lakes utilize treated sewage effluent and runoff waters to maintain operating levels. CPS Energy was a pioneer in the use of non-potable, recycled water from treated sewage effluent for cooling purposes, thereby saving higher quality, potable ground water for other uses. Braunig Lake has additional cooling capability for future generating units.

CPS Energy has contracted with the San Antonio Water System ("SAWS") to provide a maximum of 50,000 acre-feet of treated sewage effluent per year to CPS Energy. This water is supplied under contract as a firm base volume of 40,000 acre- feet and 10,000 acre-feet from exercise of two Contingent Options of 5000 acre-feet each. CPS Energy projects that these contract volumes, along with water available under existing permits, will provide sufficient cooling capacity for existing and planned generation units at these lakes.

CPS Energy owns approximately 3,000 acre-feet of Edwards aquifer ground water to supply process water and some cooling water to power plants in our service territory. CPS Energy projects that this amount of water is sufficient to maintain power plant operations under worst case electric demand conditions, coupled with drought of record assumptions. CPS Energy also purchases about 700 acre-feet per year of potable water from SAWS through standard water delivery rates for power plant process water and miscellaneous plant needs.

CPS Energy continues to manage water-related legal, supply, and conservation issues through participation in the Senate Bill 3 – Edwards Aquifer Recovery Implementation Program, the SAWS/San Antonio River Authority/San Antonio Mayor's Drought Management groups, and an internal CPS Energy water planning committee. CPS Energy has conserved water by using technologies such as once-through cooling pond (instead of cooling towers), increased power plant efficiency projects, the installation of water-efficient gas turbines (versus gas steam turbines), and new water treatment technologies. CPS Energy is continuing to study other water conservation technologies, such as dry cooling, and is actively planning for increased water usage through the implementation of air emissions technologies such as sulfur dioxide scrubbers and possible future carbon dioxide capture. See "ENVIRONMENTAL MATTERS" herein.

Papalote Creek is the latest wind farm brought on line under contract by CPS Energy. The 130.4 MW farm began operation on September 25, 2009. The Cedro Hill wind farm project is scheduled to bring 150 MW of capacity on line in late 2010. CPS Energy has also contracted for two new solar energy projects: Blue Wing Solar for 14.4 MW, located just southeast of the City; and Western Ranch Solar for 27 MW, located in West Texas. Blue Wing Solar commenced commercial operation on November 4, 2010. Western Ranch Solar was scheduled for early 2012; however, the developer terminated the contract effective September 29, 2010, due to its inability to secure financing for the project. On October 7, 2010, CPS Energy announced a solar partnership with SunEdison that will bring three 10 MW solar installations to the CPS Energy service area. CPS Energy will continue to issue Request for Proposals for renewable energy projects to help meet its goal of 1,500 MW of renewable energy capacity by 2020. Ten MW of solar will be produced by the utility's new Solartricity producer program. Participants in a two-year pilot program will install roof-mounted solar photovoltaic systems. CPS Energy will purchase power generated from the Solartricity producer program.

A new system peak demand of 4,706 MW was set on August 16, 2010. CPS Energy currently has 5,872.6 MW of fossil fuel and nuclear available and an expected summer availability of 68.9 MW of renewable generation providing a total of 5,941.5 MW to meet our summer peaking needs. For details see the "Generating Capability" table on the following page.

Generating Station Events

On June 15, 2009, V.H. Braunig Plant Unit 3 (with a unit capacity of 420 MW) underwent a controlled plant shutdown related to high vibration from its low pressure turbine. The low pressure turbine was shipped to a repair facility where the affected turbine blades were repaired. Additional inspections confirmed that the damage was limited to the low pressure turbine and the unit was returned to service August 2, 2009. Also, on June 26, 2009, the JKS 1 Plant experienced a plant trip due to a loss of the generator exciter. Within three weeks, the JKS 1 Plant was returned to service using a temporary exciter unit, which allowed the plant to operate at its rated capacity until late September 2009, when permanent repairs were made to the existing exciter. Root cause analyses of both events either have been performed and incorporated into on-going best practices applied at electric power generating facilities. These mechanical failures were unrelated. At this time there is no indication that either event could have been anticipated or avoided.

52 On February 3, 2010, during routine testing, it was discovered that a control rod was not responding to the rod control system in STP Unit 1. Analyses performed by STP Nuclear Operating Company determined that the control rod was not withdrawing properly and that the most probable cause of the issue was corrosion in the Control Rod Drive Mechanism (“CRDM”). Further analysis identified a total of four control rods that demonstrated similar symptoms. The problem was addressed by flushing the corrosion from the CRDMs of the affected control rods. Extensive testing clearly demonstrated that all affected control rods had been restored back to proper functionality; the testing also verified the functionality of the other 53 control rods. The unit was down for seven days from February 3, 2010 to February 10, 2010, and reached 100% capacity on February 10, 2010.

On September 3, 2010, JKS2 came off line so an inspection could be performed on the separate Generator Step-Up (GSU) transformer that is required to modify energy produced by JKS 2 to be sent to the transmission system. There were indications the transformer was malfunctioning. The transformer is still under warranty, and the transformer manufacturer is working diligently to correct the problem. A visual inspection along with electrical testing performed by the transformer manufacturer did not indicate conclusive evidence that there were internal faults in the transformer. However, low voltage bushings on the transformer were found to be damaged due to overheating. The transformer manufacturer believes the damaged bushings are the most probable cause of the transformer malfunction, and the transformer manufacturer has sent the bushings to the original equipment manufacturer to be rebuilt. CPS Energy is monitoring this work closely, and is developing a contingency plan in the event that the rebuilt low voltage bushings fail to rectify the transformer malfunction.

Depending upon the time of the year and actual customer demand, unplanned outages may or may not result in a need to purchase power from other providers on the market. In all of the cases noted above, the ERCOT market had more than enough reserve capacity for CPS Energy to obtain replacement power while the units were out of service. While replacement power is more expensive to CPS Energy's customers than generation from its own facilities, CPS Energy's existing rate structure allows the costs of replacement power to be funded through its monthly electric fuel adjustment fee. As a result, there was no material adverse effect on the finances of CPS Energy from replacement power associated with these events.

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53 Generating Capability1 Net Max Total Year Capability Capability Plant Fuel Installed MW3,8 MW4 STP (40% interest) Unit 1 Nuclear 1988 540 Unit 2 Nuclear 1989 540 1,080 Nuclear J.K. Spruce Plant2 Unit 1 Coal 1992 560 Unit 2 Coal 2010 775 J.T. Deely Plant Unit 1 Coal 1977 435 Unit 2 Coal 1978 436 2,206 Coal A. von Rosenberg Plant3 Unit 1 Gas 2000 481 O.W. Sommers Plant4 Unit 1 Gas/Oil 1972 445 Unit 2 Gas/Oil 1974 435 V.H. Braunig Plant4 Unit 1 Gas/Oil 1966 225 Unit 2 Gas/Oil 1968 240 Unit 3 Gas/Oil 1970 420 W.B. Tuttle Plant Unit 15 Gas 1954 0 Unit 35 Gas 1961 0 Unit 45 Gas 1963 0 Leon Creek Plant Unit 36 Gas 1953 60 Unit 4 Gas 1959 95 CT 17 Gas 2004 46.4 CT 27 Gas 2004 46.4 CT 37 Gas 2004 46.4 CT 47 Gas 2004 46.4 2,586.6 Gas/Oil

Total Capability owned by CPS Energy 5,872.6 5,872.6

Renewable Purchased Power: Desert Sky Wind Farm Wind 2002 160.5 Cottonwood Creek Wind Farm Wind 2005 100.5 Sweetwater 4 Wind 2007 240.8 Penascal Wind 2009 76.8 Papalote Creek Wind 2009 130.4 709.0 Wind Covel Gardens Landfill Gas 2005 9.6 9.6 Landfill Gas Total Renewable Purchased Power 718.6 718.6 Total Capability including Wind and Landfill Gas 6,591.2 6,591.2

(1) As of July 31, 2010. (2) JKS 1 net maximum capability reduced from 595 to 560 MW to show net rating instead of gross rating. (3) Net capability reflects summer rating. (4) For gas/oil fueled units, the capabilities shown are the gas ratings. (5) W.B. Tuttle 1, 3 and 4 are currently in mothball status. (6) Leon Creek Unit 3 has been de-rated (from 65 MW to 60 MW). (7) Combustion Turbine. (8) "Net Max Capability" adjusted on applicable units to align with ERCOT reporting.

New Generation / Conservation

One of CPS Energy's strongest aspects of operational and financial effectiveness has been the benefit it has derived from its diverse and low-cost generation portfolio, which is currently comprised of coal; nuclear; gas; various renewables such as wind, methane and a modest portion of solar; as well as purchased power. Continued diversification is a primary objective of the CPS Energy management team. Accordingly, this team periodically assesses future generation options that would be viable for future decades. This extensive assessment of various options involves projections of customer growth and demand; technological viability; upfront financial investment requirements; annual asset operation and maintenance costs; and environmental impacts.

The rapid cost escalation during the 2006 to 2008 timeframe of all physically constructed infrastructure projects eased through 2009 and 2010. CPS Energy continues to monitor proposed regulatory charges that could raise the costs of operating plants, such as those that have been proposed for units that use carbon-based fuels.

54 To mitigate the pressure on new generation construction requirements, CPS Energy management is expanding its efforts towards community-wide energy efficiency and conservation. These mitigation efforts are also referred to as the "5th Fuel" and are very important to CPS Energy's strategic energy plans and specifically to its new generation needs. CPS Energy is currently implementing energy efficiency and conservation measures designed to save approximately 771 MW of electrical demand by the year 2020. See "CUSTOMER RATES – Fuel and Gas Cost Adjustment" herein. Additionally, CPS Energy management has explored and continues to cooperatively develop opportunities with its City Council for potential changes in ordinances, codes and administrative regulations focused on encouraging commercial and residential utility customers, builders, contractors and other market participants to implement energy conservation measures. For additional information on CPS Energy's energy efficiency and conservation program, see "ENERGY CONSERVATION AND PUBLIC SAFETY PROGRAMS", herein.

In July 2010, CPS Energy completed its most recent assessment of generation resource options. This assessment included updated fuel prices, updated wholesale electric market forecasts and updated electric peak demand forecast which incorporated the most recent economic, demographic and historical demand data for the CPS Energy service territory. Additionally, this assessment included updated demand reductions due to the STEP energy efficiency and conservation program. Based on the updated demand forecast and the current CPS Energy generation resource portfolio, it is expected that a new generation resource will be needed by the summer of 2024, to meet the needs of the CPS Energy service territory and maintain a 12.5% reserve margin.

Before a commitment is made to construct the next generation facility, CPS Energy management will pursue several objectives. These objectives include the pursuit of additional stakeholder input; expanded community education about the long-term energy and conservation needs of the San Antonio community; continued option analyses and evaluations, including CPS Energy's own formalized cost estimates; additional Board approval to move forward; and expanded presentations to the City Council, which governs the related rate increases and bond issuances required to support any generation construction project.

South Texas Project

STP is a two-unit nuclear power plant with Unit 1 and Unit 2 (or Units 1 and 2) having a nominal output of approximately 1,350 MW each. STP is located on a 12,220 acre site in Matagorda County, Texas, near the Texas Gulf Coast, approximately 200 miles from San Antonio. CPS Energy currently owns 40% of these units. Participant Ownership ("Participants") in STP Units 1 and 2 and their shares therein are as follows:

Ownership Effective February 2, 20061 Participants % MW (approximate) NRG Energy ("NRG") 44.0 1,188 CPS Energy 40.0 1,080 City of Austin-Austin Energy 16.0 432 100.0 2,700

(1) In 2006, Texas Genco, holder of a 44% interest in STP, was acquired by NRG Energy, Inc. NRG Energy Inc. holds its interest in STP Units 1 and 2 in NRG South Texas LP. STP is maintained and operated by a non-profit Texas corporation ("STP Nuclear Operating Company" or "STPNOC") financed and controlled by the owners pursuant to an operating agreement among the owners and STPNOC. Currently, a four-member board of directors governs the STPNOC, with each owner appointing one member to serve with the STPNOC's chief executive officer. All costs and output continue to be shared in proportion to ownership interests.

STP Units 1 and 2 each have a 40-year NRC license that expires in 2027 and 2028, respectively. In August 2006, the Strategic Teaming and Resource Sharing ("STARS") alliance notified the NRC that a member intended to submit a license renewal application in the fourth quarter of 2010. On June 18, 2008, STPNOC sent a letter to the NRC naming STP as the STARS member who intended to submit an application in the fourth quarter of 2010. Subsequently, in October 2010, STPNOC filed an application to the NRC to extend the operating licenses of STP Units 1 and 2 to 2047 and 2048, respectively.

During the twelve-months ended July 31, 2010, the STP Units 1 and 2 operated at approximately 89.2% and 93.0% of net capacities, respectively. Unit 1 completed a refueling outage in the fall of 2009 that also involved the replacement of the reactor vessel head. On January 6, 2010, Unit 1 encountered a control rod misalignment during Control Rod Operability testing as initially described above and herein. To comply with the Technical Specification action for this condition, reactor power was reduced to less than 75%. The unit was stabilized at 73% power. Grid conditions contributed to a delay in troubleshooting of approximately 3 ½ days. Unit 1 was returned to 100% power on 55 January 19, 2010. On February 3, 2010, a similar condition on a second control rod resulted in a shutdown of Unit 1. Unit 1 was returned to full power operation on February 10, 2010. On May 26, 2010, Unit 1 experienced a tube leak in one of the main condenser waterboxes that required a reduction in power to approximately 90%. Following repair of the tube leak, the unit resumed full power operation on May 29, 2010. On August 20, 2010, a human performance error during performance of a surveillance on critical protective equipment resulted in an automatic trip of Unit 1. Unit 1 returned to full power operation on August 23, 2010.

Unit 2 was taken offline September 16, 2009, for maintenance of the plant's extraction steam system and successfully returned to full power operation on September 29, 2009. Unit 2 completed a refueling outage in the spring of 2010 that also included the replacement of the reactor vessel head. Unit 2 experienced an automatic shutdown on November 3, 2010 due to a circuit breaker malfunction. An unrelated mechanical issue will keep the unit offline for a short period of time while the issue is resolved.

Five-Year South Texas Project Capacity Factor1

Calendar Years Ended December 31, 2005 2006 20072 2008 2009 20103 Unit 1 90.0% 92.6% 107.7% 98.3% 92.1% 89.2% Unit 2 90.6% 102.5% 94.4% 97.8% 103.3% 93.0% Total 90.3% 97.6% 101.1% 98.1% 97.7% 91.1%

(1) Capacity Factor based on nameplate rating of 1250.6 MW per unit. (2) Greater than 100% due to plant upgrades. (3) Twelve months ended July 31, 2010.

Recent operational highlights for STP include the following: In 2009, for the sixth year in a row, STP led the nation in nuclear generation from a two-unit site. In total generation, Unit 1 ranked #9 of 104 reactors in the U.S. and #20 of 439 reactors worldwide. This generation performance was accomplished despite a scheduled outage for refueling and maintenance. Unit 2 ranked #2 in the U.S. and #4 in the world. In October 2009, Unit 1 completed a breaker-to-breaker production run by operating continuously between refueling outages which are scheduled 18 months apart. STP set an industry record by completing a fifth consecutive breaker-to-breaker run. In August 2009, STP received a Utility Achievement Award from the American Nuclear Society for demonstrating sustained outstanding performance.

The NRC evaluates plant performance by analyzing two distinct inputs: inspection findings from the NRC's inspection program and performance indicators that are reported by the licensee. Inspection findings and performance indicators are given a color designation based on their safety significance. The current plant assessment for STP can be found at a summary level at http://www.nrc.gov/NRR/OVERSIGHT/ASSESS/pim_summary.html, or by writing to U.S. Nuclear Regulatory Commission, Public Document Room, O-1F-13, Washington, D.C. 20555.

The NRC rules require that each holder of a nuclear plant operating license submit to the NRC a decommissioning plan, which contains, among other things, a cost estimate for decommissioning such plant and either a funding plan or a guaranty method for covering decommissioning costs for such plant. Participants in STP have filed a decommissioning plan for the STP in compliance with these rules, which includes representations by each Participant that it has established a trust into which it annually pays, throughout the life of the STP, amounts which, when accumulated with investment income, are projected to provide the funds required by the rules to pay its respective portion of such costs.

CPS Energy maintains decommissioning funds for its 28% interest in STP separate from decommissioning funds associated with its 12% STP interest ("former AEP TCC interest") to meet its decommissioning obligations for its entire 40% interest in STP. See Note 13 to CPS Energy's audited financial statements in APPENDIX B. As of June 30, 2010, the CPS Energy balance in the City Public Service Restated Decommissioning Master Trust for the South Texas Project Decommissioning Trust ("STP Decommissioning Trust") to decommission CPS Energy's 28% interest in STP was $263.0 million and exceeded estimated NRC requirements by $155.3 million. With respect to decommissioning funds for the former AEP TCC interest, the acquisition by CPS Energy and Texas Genco of AEP TCC's interest in STP includes, proportionately, the responsibility for decontamination and decommissioning, but also resulted in the transfer of decommissioning funds held in trust by AEP TCC. Under PUCT Substantive Rule 25.303, AEP TCC will continue to collect decommissioning fees from its historical retail customers, which are paid into new trust accounts applicable to the new shares of STP acquired by CPS Energy and Texas Genco. These fees are subject to review and adjustment by the PUCT at its initiative or at the request of an interested person including CPS Energy or Texas Genco. As of June 30, 2010, the CPS Energy balance in the Decommissioning Master Trust Related to the South Texas Project Interest Acquired from AEP Texas Central Company, "Master Trust (TCC Funded)", was $88.0 million. As of June 30, 2010, the balance in the Master Trust to decommission CPS Energy's 12% interest in STP exceeded estimated NRC requirements by $42.0 million. See "INVESTMENTS – STP Decommissioning Funds" and "Master Trust (TCC Funded)" herein for 56 information concerning the value of investments in the decommissioning trusts. Actual decommissioning costs could vary substantially from the estimate of such costs depending on future regulatory requirements, the method used for decommissioning, and other factors, and the amounts in the decommissioning trusts may or may not be adequate to pay these costs.

Used Nuclear Fuel Management

Under the Nuclear Waste Policy Act, 42 U.S.C. 10101, et seq. ("NWPA"), the DOE has an obligation to provide for the permanent disposal of high level radioactive waste, which includes used nuclear fuel at United States commercial nuclear power plants such as STP. To fund that obligation, all owners or operators of commercial nuclear power plants have entered into a standard contract under which the owner(s) pay a fee to the DOE of 1.0 mill per kilowatt hour (1M/kWh) electricity generated and sold from the power plant along with additional assessments. In exchange for collecting this fee and the assessments, DOE undertook the obligation to develop a high-level waste repository for safe long-term storage of the fuel and, no later than January 31, 1998, to transport, and dispose of the used fuel. That date came and went and no high-level waste repository has been licensed to accept used fuel.

According to the filings in one recent suit brought against the DOE, at least 66 cases have been filed in the Court of Federal Claims against the DOE related to its failure to meet its obligations under the NWPA by the existing owners or operators of nuclear facilities seeking damages related to ongoing used nuclear fuel storage costs. On August 31, 2000, in Maine Yankee Atomic Power Company, et. al. v. US, the United States Court of Appeals for the Federal Circuit affirmed that the DOE has breached its obligations to commercial nuclear power plant owners for failing to live up to its obligations to dispose of used nuclear fuel. Subsequent to that decision, the DOE has settled with certain commercial nuclear power plant owners and agreed to provide funds to pay for storage costs while the DOE continues to develop a permanent high-level waste repository. STP has recently received a voluntary dismissal of litigation to cover its long- term storage costs and is negotiating to obtain a reasonable settlement that would provide for those costs in light of a decision in related litigation by another utility that had not yet been forced to incur significant damages because of the DOE's breach. STP Owners will work to develop a strategy to recover any additional spent fuel storage costs from the DOE at the appropriate time.

Until the DOE is able to fulfill its responsibilities under the NWPA, the NWPA has provisions directing the NRC to create procedures to provide for interim storage of used nuclear fuel at the site of a commercial nuclear reactor. Currently, STP has adequate space in its on-site spent fuel storage pools to provide for storage of all of its used fuel. If the DOE is unable to take the used fuel from STP, sometime late this decade STP management expects to start the process of planning, licensing, and building an on-site independent spent fuel storage installation ("ISFSI"). That ISFSI is expected to have sufficient capacity to provide safe interim storage for used nuclear fuel from the current and future reactors at the STP site.

Additional Nuclear Generation Opportunities

This section describes some of the initial investigation, study and analysis that CPS Energy management undertook to explore one type of possible generation infrastructure, additional nuclear capacity. CPS Energy received Board approval to participate in the early development phase of two additional nuclear projects, with third-party co-owners; however, recent events hereinafter described superseded this initial approval.

The first possible nuclear project was scoped as the development of two additional reactors at the current STP site. These new units have been referred to preliminarily as STP Units 3 and 4. The second possible nuclear project would be a new two-unit facility tentatively located in Victoria County, which is also located in south Texas. Either or both projects, if fully developed by CPS Energy, would have delivered a portion of its power for use by CPS Energy customers in the ERCOT market.

In June 2009, CPS Energy management provided the Board its formal assessment and recommendations concerning these options compared to other possible new generation types. Management also provided its first public estimate of the cost of the first possible project at $13 billion, inclusive of financing costs. Reports of higher cost estimates, however, resulted in reconsideration of the advisability of participating in the STP Units 3 and 4 Project and, ultimately, in CPS Energy's decision to limit participation in further development of STP Units 3 and 4. In a settlement negotiated with NRG and the other participants in the development of STP Units 3 and 4, CPS Energy received a 7.625% ownership interest in the combined STP Units 3 and 4. CPS Energy will not be liable for any STP Units 3 and 4 Project development costs incurred after January 31, 2010. However, once the new units reach commercial operation, CPS Energy will be responsible for its 7.625% share of ongoing costs to operate and to maintain the units. CPS Energy 57 will also receive two $40 million installment payments upon award of a DOE loan guarantee to Nuclear Innovation North America LLC ("NINA"), a NRG/Toshiba joint venture. NINA also agreed to make a contribution of $10.0 million over a four-year period to the Residential Energy Assistance Partnership, which provides emergency bill payment assistance to low-income customers in San Antonio and Bexar County. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System – Nuclear Cost Issue and CPS Energy Internal Investigation" herein. A detailed timeline of events concerning this matter and the recent settlement of the STP 3 and 4 lawsuit is provided in the following pages:

 Regarding the STP Units 3 and 4 Project, in June 2007, STPNOC signed a technical services agreement with Toshiba Corporation ("Toshiba"), a major Japanese manufacturer of heavy electrical equipment and developer of advanced boiling water reactors ("ABWR") in Japan. Under this agreement, Toshiba agreed to perform early engineering and procurement work for STP Units 3 and 4 ("Project"). STPNOC is in the process of reserving the major, long-lead components for the Project. STPNOC has already made a reservation for the Unit 3 reactor pressure vessel forgings. Rights and obligations in the agreements with GE-Hitachi Nuclear Company ("GE- H"), Toshiba and other vendors for long-lead equipment and services were shared with CPS Energy under the terms of the NRG-CPS Supplemental Agreement.

 On September 20, 2007, NRG and CPS Energy signed the South Texas Project Supplemental Agreement ("Supplemental Agreement") under which CPS Energy elected to participate in the preliminary development of two new nuclear units at the STP nuclear power station site, STP Units 3 and 4, pursuant to the terms of the current participation agreement among the STP owners. CPS Energy could own up to 50% of the Project. The Supplemental Agreement provides for CPS Energy to reimburse NRG for its pro rata share, based on its ownership percentage, of initial project costs incurred and to pay its pro rata share of future development costs. The Boards of CPS Energy and NRG subsequently approved the Supplement Agreement which was effective on October 29, 2007. The Supplemental Agreement also provides CPS Energy and NRG with preferred rights of first refusal in the event of certain types of transfers of either NRG's or CPS Energy's interests in STP.

 On September 24, 2007, CPS Energy, subsidiaries of NRG, and the STPNOC filed a combined construction and operating license application ("COLA") with the NRC to build and operate the Project. The COLA for the Project was the first complete application for new commercial reactors to be filed with the NRC in nearly thirty years. In the COLA, the owners propose to use ABWR technology, which has been proven in four operating units in Japan. The total projected rated capacity of STP Units 3 and 4 is expected to be about 2,700 MW. On November 29, 2007, the NRC announced that it had accepted the COLA for review.

In order to develop the COLA and to provide on-going licensing support, STPNOC entered into an interim services agreement with General Electric Company ("GE"). Subsequent to entering into that agreement, GE entered into a joint venture in which it transferred its nuclear business to GE-H. GE assigned its responsibilities under the interim services agreement to GE-H. Despite its obligations in the interim services agreement, GE-H suspended licensing support for the COLA soon after it was filed with the NRC.

 Subsequently, CPS Energy and NRG determined that they would continue the Project with Toshiba Corporation, an experienced developer of ABWR units in Japan. Project development continued under a technical services agreement with Toshiba Corporation's United States subsidiary Toshiba International Corporation while the parties negotiated a definitive engineering, procurement and construction ("EPC") contract.

 On September 24, 2008, STPNOC submitted a revised COLA to the NRC reflecting CPS Energy and NRG's intention to develop STP Units 3 and 4 with Toshiba. The COLA revision also reflected the establishment of a new NRG-Toshiba Corporation partnership, called NINA, which is 88% owned by NRG and 12% owned by Toshiba Corporation. In addition to STP Units 3 and 4, NINA has proposed to develop up to two additional two-unit ABWR projects in the United States. NINA has placed its ownership interest in STP Unit 3 into a wholly-owned subsidiary, NINA STP 3, LLC, and its interest in STP Unit 4 into a wholly-owned subsidiary, NINA STP 4, LLC. In addition, Toshiba Corporation has established a United States subsidiary to develop ABWRs, called Toshiba America Nuclear Energy ("TANE"). The updated COLA reflects the relationships among the developers, CPS Energy and NINA and the new NINA, TANE, NINA STP 3, LLC and NINA STP 4, LLC entities. On February 10, 2009, the NRC issued a schedule for completing its review of the COLA. The NRC projected to issue the final Safety Evaluation Report in September 2011. Currently, the Project expects that the COLA will be received early in calendar year 2012. Receipt of the NRC-approved COLA is a condition precedent to starting significant Project construction.

 On September 29, 2008, CPS Energy filed with the DOE a Phase I application for a loan guarantee related to the development of the Project. Following the DOE's evaluation of all Phase I applications, the DOE ranked the Project third out of 14 nuclear loan guarantee project applications that were submitted. On December 19, 2008, 58 CPS Energy filed with the DOE a Phase II loan guarantee application. In a letter dated February 9, 2009, the DOE informed CPS Energy that the Project is one of five nuclear projects for which the DOE is conducting due diligence as part of its process for potentially offering loan guarantees. Subsequently, the DOE narrowed the list of nuclear project candidates for the DOE loan guarantees to four projects, including the Project. Under current legislation, should the DOE ultimately approve an applicant's filing, such a loan guarantee could be used to guarantee financing up to 80% of the debt for the applicable project. The DOE's ability to issue guarantees is limited by appropriations. Currently, there is $18.5 billion set aside for loan guarantees associated with new nuclear project development in the United States through federal fiscal year 2011. As part of the settlement with NINA, CPS Energy has withdrawn its DOE loan guarantee application.

 On November 5, 2008, STPNOC and the DOE executed a Standard Contract in which the DOE undertook the obligation to provide for permanent disposal of the used nuclear fuel from the proposed STP Units 3 and 4.

 On January 21, 2009, the Board approved increasing the project development budget for STP Units 3 and 4 to $276 million (from $206 million). On February 24, 2009, CPS Energy and its project co-owner authorized STPNOC, as their agent, to enter into an Engineering Procurement and Construction ("EPC") contract with Toshiba Corporations United States subsidiary, TANE.

 On February 24, 2009, STPNOC, as agent for CPS Energy and NINA, executed an EPC Agreement with TANE that provides terms and conditions under which STP Units 3 and 4 will be designed and constructed. The EPC Agreement has terms and conditions comparable to those for fossil-fired generating plants and has limits of liability and other provisions that are scaled to a project of this size. Toshiba has provided parent company guarantees for TANE's performance.

 Following notice published on February 21, 2009, three individuals and three groups joined to file one Petition to Intervene against the STP Units 3 and 4 COLA on April 21, 2009. This initial petition contained 28 contentions. Interveners subsequently filed seven additional contentions. As a result of NRC Licensing Board decisions, most of the contentions were dismissed. The remaining contentions have been combined into a single contention which has been admitted for further consideration. STPNOC, as agent for owners, plans to file supporting information as required to address any open issues and STPNOC staff believes these contentions can be resolved without hearings. The Project schedule already has time built into it for hearings as part of the COLA process; however, it is unclear whether contentions may result in hearings and whether hearings will affect the timing for issuance of the COLA.

 On August 31, 2009, the Board approved increasing the Project development budget for STP Units 3 and 4 to $376 million (from $276 million).

 On October 13, 2009, the Board approved selection of STP Units 3 and 4 as the next baseload generation resource and, in support thereof, approved a request to ask the City to approve $400 million in bonds to support the Project at the City Council's October 29, 2009 meeting.

 On October 27, 2009, amid reports CPS Energy had knowledge that costs of the Project might be significantly higher than previously reported, the City Council's vote on the bonds was postponed. The Board undertook action to investigate the Project cost issue. The results of this investigation were reported to the Board in late 2009 and are described below in the "Nuclear Cost Issue and CPS Energy Internal Investigation" section.

 While the Project's cost issue was being investigated, CPS Energy explored all its options regarding participation in or withdrawal from the Project. On December 6, 2009, CPS Energy filed a petition in Bexar County district court to clarify the roles and obligations of CPS Energy and NINA to define the rights of both parties should either decide to withdraw from the Project. A discussion of the resulting litigation is described below.

 On May 10, 2010, NRG announced that NINA had reached an agreement with The Tokyo Electric Power Company (TEPCO) to partner in the STP Units 3 and 4 Project. TEPCO will invest $155 million for a 10% share of NINA Investments Holdings' interest in STP Units 3 and 4. This investment will give TEPCO a 9.2375% interest in STP Units 3 and 4. TEPCO's initial investment is conditional upon receipt of a conditional commitment for a DOE loan guarantee for the Project. The investment also includes a $30 million option payment that enables TEPCO to purchase an additional 10% share of NINA Investment Holdings for approximately $125 million within one year. If TEPCO were to exercise their option, their interest in STP Units 3 and 4 would be approximately 18%. TEPCO would also be responsible for up to 20% (if the option were exercised) of the capital cost of the Project going forward. The agreement has been approved by the Boards of

59 both companies and is expected to close once NINA secures a conditional commitment for a DOE loan guarantee.

 During the presentation of second quarter earnings results held on August 2, 2010, NRG announced a reduction in spending on the Project. NRG announced that accrued Project costs would be reduced from the current level of approximately $30 million per month to approximately $20 million per month. NRG also announced that its commitment to Project spending would be reduced to $1.5 million per month. NRG reported that Toshiba had agreed to provide interim funding to cover the NRG gap. The parties are working together to adjust the near- term Project activities to maintain the overall Project schedule. NRG stated that they are confident the STP Units 3 and 4 Project will be awarded a DOE loan guarantee. However, they are not certain of the timing for the loan guarantee.

As briefly mentioned earlier, in addition to the STP Units 3 and 4 Project, CPS Energy has also explored another nuclear project with Exelon. In December 2007, CPS Energy and Exelon signed an agreement granting CPS Energy an option to participate in a possible joint investment in a nuclear-powered electric generation facility in southeast Texas ("Exelon Project"). Preliminary plans indicated that the Exelon Project would be located in Victoria County and would involve the development of two GE-H Economic Simplified Boiling Water Reactors ("ESBWR"), nominally rated at 1,520 megawatts each. Under this agreement, CPS Energy has the option to acquire between a 25% and a 40% ownership in the Exelon Project. On September 3, 2008, Exelon filed a COLA with the NRC to build and operate Victoria County Station Units 1 and 2. On October 30, 2008, the NRC docketed the COLA for a detailed review. Subsequently Exelon determined that it was unable to reach commercial terms with GE-H. Exelon announced on November 24, 2008, that they intended to select another technology, other than the ESBWR, for the Exelon Project. On December 18, 2008, the NRC placed on hold the review of Exelon's COLA. On March 27, 2009, Exelon announced that it selected Hitachi's ABWR design for the Exelon Project and that it planned to revise the COLA and its DOE Loan Guarantee application accordingly. The Exelon Project failed to qualify for the initial round of DOE loan guarantees. Exelon has filed an Early Site Permit application with the NRC for the Victoria County location. CPS Energy will continue to monitor the Exelon Project.

Nuclear Cost Issue and CPS Energy Internal Investigation

Following the postponement of the City Council's vote, the Board undertook an investigation to determine whether CPS Energy management had knowledge of an increase in a preliminary cost estimate for STP Units 3 and 4 and why that information was not communicated to the Board. Specifically, the Board asked the CPS Energy Chief Audit & Ethics Officer to investigate and answer the following questions: (1) Who knew what information, by when, and who did they inform?; (2) Was there malicious intent to withhold information?; (3) Was there a failure to exercise prudent judgment and/or a failure to communicate in a timely manner?; and (4) Did the individuals understand their roles and accountabilities?

An outside law firm was hired to assist in the investigation, which took approximately four weeks to complete and involved the reviews of internal documents, interviews of numerous individuals and the preparation of a written report that was publicly disclosed on December 7, 2009. The results of this investigation were reported to the Board in late November and early December 2009 and, based on that report, the Board adopted a resolution finding that there was a failure of communication from certain members of CPS Energy executive management to the Board and the City Council regarding the "revised cost estimate" that was publicly disclosed in October 2009; that the failure of communication resulted in substantial part from a good faith belief that the "revised estimate" was not a formal estimate supported by data but, instead, was communicated as part of the ongoing negotiation process expected to lead to a contractually required formal cost estimate due on or about December 31, 2009, pursuant to the terms of the EPC Agreement; and that there was no malicious intent on the part of any member of the management team in connection with the failure of communication. The investigation report also concluded that no member of management instructed any other employee to conceal or withhold any information from the Board and that lack of information flowing to the Board was, at worst, due to a difference of opinion about what information should be deemed material and deserving of the Board's attention.

During the course of the investigation, several changes occurred in the Board and personnel:

 Shortly after the Board initiated its investigation, two senior CPS Energy staff members involved in the Project were placed on administrative leave pending results of the investigation.

 On November 26, 2009, Interim General Manager Steve Bartley resigned; a severance agreement was reached with Mr. Bartley.

60  On November 30, 2009, the Board adopted a resolution accepting the findings and results of the investigation, and reinstating the two senior staff members who had been placed on administrative leave.

 Also on November 30, 2009, Jelynne LeBlanc-Burley was named Acting General Manager (a role in which she served until August 1, 2010) and the Board accelerated its search for a new CEO to replace Milton Lee upon his previously-announced retirement in 2010.

 On December 15, 2009, Deputy General Counsel Robert Temple resigned; a severance agreement was reached with Mr. Temple.

 During the course of the public controversy surrounding the investigation, the Mayor and certain City Council members called for the resignation of Board Chair, Aurora Geis and long-time trustee Stephen Hennigan. Ms. Aurora Geis resigned effective January 14, 2010, and Mr. Charles E. Foster, a retired AT&T executive, was selected to replace her on the Board.

 On January 22, 2010, Mr. Charles E. Foster was elected Chairman of the Board.

 Mr. Hennigan continues to serve on the Board; his term ends in January 2011. The Board solicited applicants to fill this upcoming vacancy and received 44 responses, which are currently being reviewed with an anticipated date of selection of Mr. Hennigan's replacement to occur in January 2011.

While the Project's cost controversy was being investigated, CPS Energy explored all its options regarding participation in or withdrawal from the Project. One of the steps it took to clarify its rights under the existing project agreements, including the EPC Agreement, was to seek judicial clarification regarding the consequences of unilaterally withdrawing. The resulting lawsuits were dismissed, subject to final execution of documents reflecting a settlement reached between CPS Energy and NINA (which were signed on March 1, 2010).

This litigation involved the following causes of action:

 On December 6, 2009, CPS Energy filed a declaratory judgment action in State District Court in Bexar County seeking clarification of its rights under existing contracts with NINA and NRG regarding the parties' development of and participation in the Project.

 In mid-December 2009, CPS Energy and NINA/NRG commenced discussions about a way to achieve a reasonable business solution to the litigation. CPS Energy also continued its previously-initiated effort to sell some or all of its interest in the Project.

 On December 23, 2009, NINA filed an answer to the CPS Energy petition and also filed a counterclaim alleging breach of contract and requesting declaratory relief, a temporary injunction and forfeiture of CPS Energy's interest in the Project.

 On December 23, 2009, CPS Energy responded to NINA's counterclaim by filing an amended petition asserting additional causes of action against NINA, NRG and Toshiba including tortious interference with contract, fraud, negligent misrepresentation, and business disparagement, among others. The amended claim sought exemplary and punitive damages of up to $32 billion.

Only CPS Energy's declaratory judgment action was pursued in court. The court found that CPS Energy would not forfeit its interest upon withdrawal, but would continue to be a tenant in common even if it ceased funding development of the Project. However, with both sides still interested in a business solution for all remaining matters, a settlement was pursued. CPS Energy and NINA/NRG reached a business agreement to resolve their differences in the Project. By the terms agreed upon with NINA, CPS Energy received a 7.625% ownership interest in the Project, an interest expected to entitle CPS Energy to approximately 200 MW of power, depending on the output of the units, once they reach commercial operation (expected to occur in 2017-2018). Based on the latest load forecast, CPS Energy does not anticipate needing this power or any additional base load generation until 2024. This interest in the Project will satisfy almost 40% of that need and is expected to contribute to meeting whatever carbon requirements may be imposed by federal legislation. CPS Energy will, therefore, not need to make a decision regarding additional base load generation until at least 2015, but at that time will consider natural gas combined cycle units, natural gas peaking units, renewable energy, nuclear generation, and other conventional and nonconventional technologies that may or may not be currently available. The time period between 2015 and 2024, when the power will be needed, will be used for planning and construction.

61 CPS Energy currently owns a percentage of the common facilities related to its ownership in STP Units 1 and 2, which will also be used by STP Units 3 and 4 when they become operational. One component of the STP Units 3 and 4 settlement was the transfer of a percentage of the ownership in the common facilities from CPS Energy to NINA. Tax- exempt debt was used to acquire and construct these common facilities and a portion of that debt is still outstanding. The IRS private business use regulations prevent state and local governments from transferring the benefits of tax-exempt financing to private business interests. On May 11, 2010, CPS Energy used a combination of cash and taxable debt from its Flexible Rate Revolving Note Program to defease $25,745,000 in principal amount of the allocable portion of the debt (being both outstanding Senior Lien Obligations and Junior Lien Obligations) associated with the common facilities of STP Units 3 and 4, that are now owned by NINA.

Qualified Scheduling Entity

CPS Energy operates as an ERCOT Level 4 Qualified Scheduling Entity ("QSE") representing all of CPS Energy's assets and load. The communication with ERCOT and the CPS Energy power plants is monitored and dispatched 24 hours per day/365 days a year. Functions are provided from the Energy Market Center housed within the main office. Backup facilities have also been created. QSE functions include load forecasting, day ahead and real time scheduling of load, generation and bilateral transactions, generator unit commitment and dispatch, communications, invoicing and settlement.

The QSE will update systems and prepare personnel to accommodate the newly designed ERCOT "Nodal" Market design. See "CERTAIN FACTORS AFFECTING THE ELECTRIC UTILITY INDUSTRY – Post Senate Bill 7 Wholesale Market Design Developments" herein. The new market design will vastly change the procedures to dispatch generation and schedule bilateral transactions. CPS Energy is currently designing new processes and systems to continue to operate as a QSE in the new market.

Transmission System

CPS Energy maintains a transmission network for the movement of large amounts of electric power from generating stations to various parts of the service area and to or from neighboring utilities and for wholesale energy transactions as required. This network is composed of 138 and 345 kilovolt ("kV") lines with autotransformers to provide the necessary flexibility in the movement of bulk power.

Interconnected System

The electric system is integrated with more than 100 other utilities, municipalities, independent power producers, power marketers, and co-operatives in Texas to form ERCOT, which covers a large portion of Texas. The ERCOT system is operated entirely within the State and is connected to other reliability councils and Mexico through three direct-current lines, providing only limited import/export capability. CPS Energy and the nine utilities below are the major transmission entities in ERCOT:

American Electric Power Service Corporation Austin Energy Brazos Electric Power Co-op CenterPoint Energy City of Brownsville Public Utilities Board LCRA Transmission Services Corp. South Texas Electric Co-op/Medina Electric Co-op Texas Municipal Power Agency ONCOR Electric Delivery

The transmission facilities of the nine above entities, along with CPS Energy, have been integrated into a single control area, which is operated by ERCOT acting as the ISO. ERCOT operates the transmission grid through each of the transmission-owning entities that maintain direct control and maintenance of their respective portions of the transmission infrastructure.

Pursuant to the PUCT's open access transmission rule, discussed under "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – Transmission Access and Rate Regulation" herein, ERCOT members and other wholesale market participants jointly established, by a filing with the PUCT in 1996, the ERCOT organization as an ISO and an integrated electronic transmission information network. ERCOT's responsibilities, which were augmented in 1999 under SB 7 for the pending retail competitive market, include daily administration of the ERCOT transmission tariffs, including alternate dispute resolution procedures, coordination of the scheduling of ERCOT generation and transmission, directing the redispatch of ERCOT generation and transmission transactions for economic purposes, preserving system reliability, and administering the electronic transmission information network. ERCOT also manages commercial operations of the 62 wholesale power market as well as acts as a single clearinghouse for retail customer switches and metering information. ERCOT does not purchase or sell bulk electricity, nor does it dispatch generation facilities. Beginning July 31, 2001, ERCOT began operating the interconnected system as a single control area, in contrast to the multiple control areas historically in place, as part of the transition to the retail competitive market, which was fully implemented on January 1, 2002. As a participant as a generation entity, load serving entity, and transmission owner in the ERCOT wholesale market, CPS Energy is obligated to comply with all rules established by ERCOT as reflected in its protocols and operating guides, which are subject to change from time to time and subject to oversight and review by the PUCT. ERCOT's costs of converting to a single control area and of administering system operations for the competitive retail market are recovered through an administrative fee assessed to system participants, including CPS Energy, allocated on a load-ratio share basis. CPS Energy recovers the fee through the billing adjustment discussed above under "CUSTOMER RATES – Governmentally Imposed Fees, Taxes or Payments".

CPS Energy is also complying with the North American Electric Reliability Corporation's reliability standards, including the new Critical Infrastructure Protection standards. CPS Energy must comply with these standards as a Transmission Planner, Transmission Owner, Distribution Provider, Generation Owner and Generation Operator. CPS Energy is continually monitoring for proposed new reliability standards and the potential of violations related to the new standards, but does not anticipate any violations of known standards to date that would have a material financial impact.

Distribution System

The distribution system is supplied by 76 substations strategically located on the high voltage 138 kV transmission system. The central business district of the City is served by nine underground networks, each consisting of four primary feeders operated at 13.8 kV, transformers equipped with network protectors, and both a 4-wire 120/208 volt secondary grid system and a 4-wire 277/480 volt secondary spot system. This system is well designed for both service and reliability.

Approximately 7,610 circuit miles (three-phase equivalent) of overhead distribution lines are included in the distribution system. These overhead lines also carry secondary circuits and street lighting circuits. The underground distribution system consists of 362 miles of three-phase equivalent distribution lines, 83 miles of three-phase Downtown Network distribution lines, and 4,391 miles of single-phase underground residential distribution lines. Many of the residential subdivisions added in recent years are served by underground residential distribution systems. At July 31, 2010, the number of street lights in service was 79,468. The vast majority of the lights are high-pressure, sodium vapor units.

GAS SYSTEM

Transmission System

The gas transmission system consists of a network of approximately 86 miles of steel mains that range in size from 4 to 30 inches. The entire system is coated and cathodically protected to mitigate corrosion. The gas transmission system operates at pressures between 135 psig and 1,118 psig, and supplies gas to the distribution system. A Supervisory Control and Data Acquisition ("SCADA") computer system monitors the gas pressure and flow rates at many strategic locations within the transmission system. Additionally, most of the critical pressure regulating stations and isolation valves are remotely controlled by SCADA.

Distribution System

The gas distribution system consists of 293 pressure regulating stations and approximately 5,053 miles of mains. The system consists of 2 to 30-inch steel mains and 1-1/4 to 8-inch high-density polyethylene (plastic). The distribution system operates at pressures between 9 psig and 274 psig. All steel mains are coated and cathodically protected to mitigate corrosion. The vast majority of the gas services are connected to the distribution system, and the gas normally undergoes a final pressure reduction at the gas meter to achieve the required customer service pressure. Critical areas of the distribution system are also remotely monitored by SCADA and designated critical pressure regulating stations and isolation valves are also remotely controlled by SCADA.

63 Proposed Rule Relating to Replacement of Gas Distribution Facilities

In September 2010, the Texas Railroad Commission ("Commission") published a proposed rule relating to replacement of gas distribution facilities, primarily those involving steel service lines. The proposed rule requires all gas distribution utilities in Texas to develop and implement a risk-based plan to replace steel distribution facilities and, if steel service lines are determined to be the greatest risk of failure, to establish an accelerated replacement program. CPS Energy has utilitzed a risk-based plan for facility replacement for a number of years and it has been successful in significantly reducing system leak rates on mains and services as well as lost and unaccounted-for gas. This plan has been shared with the Commission and CPS Energy is working with the Commission as it finalizes its rule to resolve unclear language and to attempt to ensure that any rule the Commission adopts will be compatible with CPS Energy's plan.

OTHER ELECTRIC AND GAS SYSTEMS STATISTICS1

Electric System Gas System Overhead Underground Distr. Transmission Distribution System & Gas Supply Distribution System System Network Pipe Line System2 Substations 163 76 Miles of Lines 1,472 7,610 4,3914 835 Kilovolts 138/345 13.2/34.5 13.2/34.5

Miles of Main 86 5,053 Main Sizes (inches) 4 - 30 1 1/4 - 30 Main Pressures (psig) 135 – 1,118 9 – 2742 ______(1) As of July 31, 2010. (2) Maximum allowable operating pressure. (3) Includes switchyards. (4) Underground single phase, includes 362 miles three-phase commercial, industrial lines. (5) Downtown Network three-phase.

GENERAL PROPERTIES

Operation Control System

The Energy Management Center ("EMC") is the facility where system operators use SCADA systems to monitor and control the CPS Energy electric transmission and distribution systems, and the CPS Energy gas supply pressure and distribution systems. All substations, power plants and major gas regulating points are continually monitored and displayed on one-line diagrams on video screens. Abnormalities register an alarm and the system operator can reset certain circuit breakers and valves as required, maintaining delivery of gas or electric service. In addition to the control capability, the system gathers data that are recorded on a computer for various reporting needs. The operation and control function located at the Jones Avenue facility, upgraded and expanded in 1999, serves as the secondary/back-up control center to ensure continued reliability of utility service to CPS Energy's customers in the event of the loss of the EMC.

Support Facilities

Core business operations are supported by various support facilities used for maintenance of such items as meters, transformers, communication equipment, vehicles, railroad cars and heavy construction equipment. These maintenance facilities, together with warehouses, administrative offices, customer service centers and storage areas, are strategically located throughout the service area to minimize driving time to work locations.

General Offices and Customer Service Centers

The Main Office Complex comprised of the Main Office and Navarro Buildings, makes up CPS Energy's General Offices, and is located at the intersection of Navarro and Villita Streets in downtown San Antonio. Executive, administrative, financial, information technology and engineering functions are located at the complex. The Main Office Building includes 11 floors of office space with adjacent surface level parking. The Navarro Office Building provides 64 three floors for office space, is connected to the Main Office Complex by an enclosed elevated walkway, and includes a 7 floor parking garage.

CPS Energy's customer service center staff provides information concerning customer accounts and processes customer payments. Customer service centers and authorized pay agents are geographically located in all sectors of the service area. These centers are convenient to the customers' homes and in locations readily accessible to freeways. The Northside Customer Service Center serves as a walk-in center, customer call center, and additional general office space for personnel. The facility is an environmentally friendly facility.

Construction Centers and Service Centers

In 2008, CPS Energy began leasing a combined office and industrial building that serves as a new construction center. The primary function of this center is to pilot the redesigned new service delivery process, which is limited to new construction. CPS Energy owns four other construction centers, accommodating electric and gas construction, repair and maintenance services, support personnel for administration, planning, training, warehousing functions and garage facilities. The Salado Street Central Garage Service Center serves as the primary central garage for heavy equipment and vehicle repair and maintenance functions, with separate buildings housing a central printing shop, safety and health functions, billing operations, remittance processing, and warehousing.

Assembly Building

The Villita Assembly Building is located in downtown San Antonio near the Main Office Complex. The main hall has a capacity to accommodate 1,840 people as an auditorium or 858 for a dinner function. The building is used for CPS Energy sponsored meetings and events and leased out to local civic, community, and non-profit organizations for major banquets, meetings and social events.

Vehicles and Work Equipment

CPS Energy operates and maintains a fleet of automobiles, trucks, and heavy construction equipment. The garage facilities, located at CPS Energy's service and construction centers, are staffed with trained mechanics that provide a majority of the maintenance performed on the vehicles and equipment. Major maintenance on heavy construction equipment is performed at the Salado Street Central Garage Service Center.

SUMMARY OF INSURANCE PROGRAMS

CPS Energy maintains property and liability insurance programs that combine self-insurance with commercial insurance policies to cover major financial risks. The property insurance program provides $5.7 billion of replacement value for property and boiler, machinery loss coverage including comprehensive automobile coverage, fire damage coverage for construction equipment, and valuable papers coverage. The deductible for the property insurance policy is $5.0 million per occurrence with a secondary deductible of $1.0 million per occurrence applicable to non-power plant and non- substation property locations. The liability insurance program includes (1) excess liability coverage with a $100.0 million policy limit at a $3.0 million self-insured retention, and (2) excess workers compensation coverage with a $35.0 million policy limit at a $3.0 million self-insured retention. Other property and liability insurance coverages include employment practices liability, fiduciary liability, employee travel, event insurance, and commercial crime. CPS Energy also maintains insurance reserves, which as of July 31, 2010, totaled $14.6 million to cover losses under the self-insurance portion of the insurance program.

CPS Energy and the other participants in STP Units 1 and 2 maintain NRC-required nuclear liability, worker liability, and property insurance, each of which includes provisions for retrospective assessments depending on occurrences at STP Units 1 and 2 and other commercial nuclear plants. CPS Energy is liable for 40% of the premiums and any retrospective assessments with respect to STP Units 1 and 2 insurance, and for costs of decontamination and repairs or replacement of damaged property in excess of policy limits; however, under PUCT regulations, AEP TCC's historical customers bear the risk associated with decommissioning that portion of STP Units 1 and 2 previously owned by AEP TCC.

65 ENVIRONMENTAL MATTERS

CPS Energy operations have the potential to affect the environment in a variety of ways, but primarily through discharges to air, land and water. To minimize environmental impact, CPS Energy constructs and operates its facilities according to, and often in excess of, the standards established for the utility industry by Federal, State, and local laws and regulations. CPS Energy's commitment to the environment is evidenced by its official environmental policy, which places the responsibility for regulatory compliance on all CPS Energy employees, regardless of job function or title. A full-time Environmental Department consisting of educated and trained professionals oversees the enforcement of this policy. Since 1996, environmental operating procedures ("EOPs") have been developed to provide guidance to CPS Energy employees as to how to perform their jobs in a way that protects the environment.

Federal Clean Air Act

Congress enacted the Clean Air Act Amendments of 1990 ("Clean Air Act Amendments") with the intent of improving ambient air quality throughout the United States. All of CPS Energy's generating units in Bexar County have been issued Federal Operating (Title V) permits and Federal Acid Rain (Title IV) permits under the Clean Air Act by the TCEQ.

CPS Energy received a Plantwide Applicability Limit ("PAL") permit from the TCEQ for the Calaveras Power Station. This PAL permit sets a cap on emissions at the site based on past emissions. This is a voluntary permit submitted by CPS Energy to provide flexibility to better manage facility-wide emissions. The PAL permit allows CPS Energy to have limited flexibility in maintaining its Calaveras Lake units while enhancing environmental protection. CPS Energy's PAL permit includes a commitment to maintain emission reductions already achieved.

On September 8, 2009, the EPA proposed to disapprove key aspects of the Texas clean-air permitting program that do not meet federal Clean Air Act requirements followed by other states. Final decisions about changing the program will be made under an expedited schedule agreed to under a recent settlement with Texas businesses. EPA intends to work with the state and interested parties to quickly identify and adopt changes. Standard Permits for Pollution Control Projects are no longer a permitting option.

Sulfur Dioxide: One objective of the Clean Air Act Amendments is to reduce emissions of sulfur dioxide ("SO2"), a gaseous emission formed during the combustion of coal by coal-burning power plants. The JKS 1, the J.T. Deely Plant Unit 1 and Unit 2 and older gas units (excluding AVR and Leon Creek CTs) are subject to the Clean Air Act Amendments' SO2 emission allowance system. An allowance is an authorization to emit one ton of SO2 during or after a specified year. Under the emission allowance system, each affected generating facility is issued annual allowances based upon a variety of factors. No utility may emit more tons of SO2 in a year than is authorized by its total allowances. Allowances issued to one generating facility may be used by a utility to offset the emissions of another generating facility. Allowances not needed by the recipient utility for its current emissions may be banked for future use, or they may be sold or otherwise transferred. CPS Energy upgraded the JKS 1 scrubber in early 2009 prior to the JKS 2 unit coming on line because of a commitment made in the JKS 2 air permitting process, which required JKS 1 to reduce SO2 emissions by the amount expected to be emitted by JKS 2.

On July 11, 2008, the District of Columbia Court of Appeals vacated the Clean Air Interstate Rule ("CAIR") in its entirety. In late December 2008, D.C. Circuit Court of Appeals granted the EPA's petition to remand CAIR to the Agency to be "fixed" rather than be vacated. CAIR is back in effect, but the EPA is responsible for replacing the rule consistent with the Court's July 2008 findings. CAIR, published in May of 2005, greatly reduced the value of allowances allocated to each utility starting in 2010 with further reductions by 2015. The rule allowed units to use SO2 allowances they have saved over the years at various ratios. CPS Energy believes these allowances will cover the operation of the Deely units until scrubbers are installed. On July 6, 2010, the EPA issued a Notice of Proposed Rulemaking, the Air Transport Rule, that would require a significant reduction in SO2 and nitrogen oxide ("NOx") emissions from power plants in 31 states located in the Eastern half of the U.S. Texas is not currently included in the SO2 requirements. Until the rule is final, the current CAIR requirements are in effect.

Nitrogen Oxides: In addition to SB 7 regulations that require NOx reductions at CPS Energy's formerly grandfathered gas units, the TCEQ implemented additional rules. Chapter 117 regulations require all fossil fuel power plants to achieve a NOx emission level cap. For coal units this cap is based on a NOx emission rate of 0.165 lb/MMBtu (pounds per million British thermal units) by mid-2005; for gas units this cap is based on a NOx emissions rate of 0.14 lb/MMBtu. However, CPS Energy management chose to comply with a system cap rather than the emission specifications. CPS Energy met the system cap for the calendar year 2009 and is on target to meet the system cap for calendar year 2010, with total projected emissions of 9,079 tons. The revised CAIR reduced the NOx emission rate to less than 0.15 66 lb/MMBtu in the first phase and will be accomplished via statewide allocations that are required to be met in 2009 with further reductions by 2015. The new rule is a cap and trade rule which means that specific units are not required to meet any particular emission limit, only that they have adequate NOx allowances for the amount they actually emit. CPS Energy isl adding SCR technology to J.T. Deely Unit 2, and is evaluating adding the same technology to J.T. Deely Unit 1 and/or JKS 1. CAIR has a limited provision for allowances for new units.

In July 2010, the EPA proposed a rule that would replace CAIR, called the Air Transport Rule. The proposal includes Texas in an Ozone Season only NOx program. Ozone season includes the summer months of May- September. Since the Air Transport rule is just a proposal, it is unclear what the final rule will require.

Mercury: In early 2004, the EPA published a proposed rule to reduce mercury to a level of 21 X 10-6 lb/MWh (pounds per megawatt hour) from new units (about 2.0 lb/trillion Btu) and CPS Energy agreed to this level for the new JKS 2 unit. The final rule published in May 2005, called the Clean Air Mercury Rule, established mercury emission limits on new and existing units and set up a cap and trade system starting in January 1, 2010. The final rule had a less stringent mercury limit for new units; however, CPS Energy agreed to the previously proposed level and the final JKS 2 unit permit has a mercury limit (2.0 X 10-5 lb/MWh), which is currently being met. The EPA goal is that emissions of mercury from power plants be reduced by 70% from 1999 levels which will result in a 15 ton cap nation-wide in 2018. The final rule also required continuous mercury monitoring to be installed and operational by January 1, 2009.

CPS Energy has been preparing to meet mercury limits on all the coal units according to the JKS 2 permit limit and Clean Air Mercury Rule; however, that may change due to a February 8, 2008 Washington D.C. Circuit court decision to vacate the Clean Air Mercury Rule. On February 25, 2009, the Supreme Court declined to hear arguments in the appeal petition filed by the Utility Air Regulatory Group ("UARG"). The Supreme Court's rejection of the petition to hear the case means that D.C. Circuit Court of Appeals decision to remand the case to the EPA stands. One potential outcome of this litigation is that the EPA will have to regulate mercury using another section of the Clean Air Act and the limits will be more stringent. The EPA issued an Information Collection Request ("ICR") in order to collect data to promulgate a new rule for mercury. CPS Energy received the ICR for all 4 coal units at the Calaveras Power Station. The EPA is expected to propose a rule in late 2011. CPS Energy has installed mercury monitors on all coal units and will take steps as needed to comply with new regulations once those are issued and made final.

Ozone ("O3"): On March 12, 2008, the United States Environmental Protection Agency (the "EPA") revised national ambient air quality standards ("NAAQS") for ground-level ozone (the primary component for smog). This revision was part of a required review process mandated by the Clean Air Act, as amended in 1990. Prior to the revision, an area met the ground-level ozone standards if the three-year average of the annual fourth-highest daily maximum eight hour average at every ozone monitor (the "eight-hour ozone standard") was less than or equal to 0.08 parts per million (ppm). Because ozone is measured out to three decimal places, the standard effectively became 0.084 as a result of rounding. For years 2005 – 2007, during which the old standard applied, San Antonio maintained average ozone readings of 0.082 ppm and therefore, has been compliant with historic EPA ground-level ozone standards.

The EPA's March 2008 revision changed the NAAQS such that an area's eight-hour ozone standard must not exceed 0.075 ppm rather than the previous 0.084. Thus in 2007, under the new standard, the City would not have complied with the federal requirements regarding ground-level ozone. Since 2007, however, San Antonio's unofficial eight-hour ozone average has been falling. According to the Texas Commission on Environmental Quality ("TCEQ"), the three-year average in 2008 was 0.078 ppm and as of June 9, 2009 it was 0.074 ppm for 2009.

The Clean Air Act requires the EPA to designate areas as "attainment" (meeting the standards), "nonattainment" (not meeting the standards), or "unclassifiable" (insufficient data to classify). As a result of the revisions to the NAAQS, states were required to make recommendations to the EPA no later than March 12, 2009 for areas to be classified attainment, nonattainment, or unclassifiable. Texas Governor Rick Perry submitted a list of 27 counties in Texas, including Bexar, that should be designated as nonattainment. Even if the 2008 data, as recorded above, is certified by the EPA, San Antonio would still be classified as an area of nonattainment under the revised NAAQS.

On January 6, 2010, the EPA formally proposed a regulation that would lower the primary NAAQS for ozone to a level within a range of 0.060 to 0.070 ppm. The EPA postponed issuing a final rule revising the ozone NAAQS standards from August 31, 2010 to October 2010. Under the Clean Air Act, the EPA has two years from the time it revises the NAAQS to complete the designation process. Therefore, if the EPA adheres to its published schedule, final designations for all areas must be issued no later than August 31, 2012, unless there is insufficient information to make such designations (in which case designations will be made by the EPA not later than August 31, 2012). If the EPA intends to issue a designation that deviates from a state's recommendation, it must notify the state at least 120 days prior to promulgating the final designations. Following the issuance of final designations, states are required to submit State Implementation Plans ("SIPs") outlining how they will reduce pollution to meet the new standards. These SIPs will be due to the EPA by 67 a date that it will establish under separate rule, but in no case will that date be later than three years after the EPA's final designations (e.g., 2015 if the EPA makes its designations in 2013.) In conjunction with the revised NAAQS, the EPA has proposed separate rules to address monitoring the new standard. Generally, the proposal from the EPA would require a greater number of EPA-approved monitors in both urban and non-urban areas and longer ozone monitoring seasons in many states. For Texas specifically, the proposal calls for year-round monitoring throughout the state. On July 16, 2009, the EPA proposed to revise its monitoring network design requirements for ozone to assist in implementation of the 2008 ozone NAAQS. The comment period closed on September 14, 2009. The EPA has not stated whether its decision to withdraw the 2008 ozone NAAQS will delay the release of the final ozone NAAQS monitoring rule.

Any State plan formulated to reduce ground-level ozone may curtail new industrial, commercial and residential development in San Antonio and adjacent areas (the "San Antonio Area"). Examples of past efforts by the EPA and the TCEQ to provide for annual reductions in ozone concentrations in areas of nonattainment under the former NAAQS include imposition of stringent limitations on emissions of volatile organic compounds ("VOCs") and nitrogen oxides ("NOx") from existing stationary sources of air emissions, as well as specifying that any new source of significant air emissions, such as a new industrial plant, must provide for a net reduction of air emissions by arranging for other industries to reduce their emissions by 1.3 times the amount of pollutants proposed to be emitted by the new source. Studies have shown that standards significantly more stringent than those currently in place in the San Antonio Area and across the State are required to meaningfully impact an area's ground-level ozone reading, which will be necessary to achieve compliance with the new eight-hour ozone standard. Due to the magnitude of air emissions reductions required as well as the limited availability of economically reasonable control options, the development of a successful air quality compliance plan for areas of nonattainment within the State has proven to be extremely challenging and will inevitably impact a wide cross-section of the business and residential community.

Failure by an area to comply with the eight-hour ozone standards by the requisite time could result in the EPA's imposing a moratorium on the awarding of federal highway construction grants and other federal grants for certain public works construction projects, as well as severe emissions offset requirements on new major sources of emissions for which construction has not already commenced.

Other constraints on economic growth and development include lawsuits filed under the Clean Air Act by plaintiffs seeking to require emission reduction measures that are even more stringent than those approved by the EPA. From time to time, various plaintiff environmental organizations have filed lawsuits against the TCEQ and the EPA seeking to compel the early adoption of additional emission reduction measures, many of which could make it more difficult for businesses to construct or expand industrial facilities or which could result in travel restrictions or other limitations on the actions of businesses, governmental entities and private citizens. Any successful court challenge to the currently effective air emissions control plan could result in the imposition of even more stringent air emission controls that could threaten continued growth and development in the San Antonio Area.

It remains to be seen exactly what steps will ultimately be required to meet federal air quality standards, how the EPA may respond to developments as they occur, and what impact such steps and any EPA action have upon the economy and the business and residential communities in the San Antonio Area.

Carbon Dioxide: The United States Supreme Court has rendered its first major decision in the climate change arena. In Massachusetts v. EPA, 549 U.S. 497 (2007), the Supreme Court held that carbon dioxide ("CO2") and other greenhouse gases from motor vehicles are "air pollutants" and are subject to regulation under the Clean Air Act. There have also been several bills introduced in Congress that propose to regulate greenhouse gases ("GHGs") through a cap and trade and/or quasi-carbon tax program. In July 2008, the EPA issued an Advance Notice of Proposed Rulemaking ("ANPR") outlining issues and options associated with regulating GHG under the Clean Air Act.

In a noteworthy Clean Air Act decision, in the wake of Massachusetts v. EPA, the Environmental Appeals Board

("EAB") avoided the key question of whether CO2 is currently "subject to regulation" under the Clean Air Act. In the Matter of Deseret Power Electric Cooperative, EAB App. No. PSD 07-03 (November 13, 2008) it appears that the decision is carefully designed to leave open for the Obama Administration the question of whether CO2 will be regulated under a key EPA permitting program. EAB sided with the EPA, agreeing that EPA is not required to treat CO2 as "subject to regulation" for purposes of the Prevention of Significant Deterioration ("PSD") permitting program.

However, EAB found that EPA could exercise its discretion to treat CO2 as "subject to regulation," and thus require permit limits for CO2 based on the best available control technology ("BACT"). Based upon guidance from the Bush Administration, EPA made it clear that, for both legal and policy reasons, it did not want to treat CO2 as "subject to regulation" under the Clean Air Act. This position was confirmed in a memorandum dated December 18, 2008, from

Stephen L. Johnson, the Administrator of the EPA, establishing that CO2 is not "subject to regulation" under the Clean Air Act. The EAB found, however, that the Deseret permitting record was not adequate to support this position. It then remanded the permit back to the EPA with instructions that will make it difficult for the EPA to respond to the remand 68 until the Obama Administration takes a position. In doing so, the EAB has created significant uncertainty for anyone planning to construct virtually any type of commercial building or industrial facility (such as a new power plant). As CPS Energy is not currently seeking a new PSD permit for any of its facilities, CPS Energy is not currently affected by this decision.

In April 2009, the EPA proposed a public health endangerment finding under Section 202. An endangerment finding under Section 202, or any other similar section, is the necessary prerequisite to mandatory regulation. In most instances, once an endangerment finding is made, the Clean Air Act requires the EPA to regulate the subject pollutant. That mandatory duty to regulate, combined with the cascading effect of a single endangerment finding, means that the EPA may face a burden of needing a regulatory regime in place for all emission sources at the time it starts to regulate the first source. Accordingly, the creation of GHG emission standards for new motor vehicles could trigger a duty for the EPA to regulate GHG emissions from stationary sources under other Clean Air Act ("CAA") sections, such as the development of NAAQS, New Source Performance Standards ("NSPS"), the Prevention of Significant Deterioration ("PSD") program, Title V, and National Emission Standards for Hazardous Air Pollutants ("NESHAP"). On May 12, 2010, Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) released the comprehensive climate change and clean energy bill, titled the "American Power Act". The bill included similar targets to ACES to reduce economy-wide GHG emissions from 2005 levels.

CPS Energy is monitoring and evaluating proposed legislation, and continues to document its climate change activities, particularly its GHG emissions. CPS Energy has included a potential carbon dioxide cost in its assumptions as it evaluates alternatives for meeting the growing demand for electricity in the CPS Energy service territory. In conjunction with the Alamo Area Council of Governments, the City coordinated the development of a regional GHG emission inventory and entity-specific emission inventories for the SAWS, Bexar County, CPS Energy and itself. The baseline year chosen for the inventory is 2005. CPS Energy is also working on its GHG inventory for the years 2006 - 2009. CPS Energy is working with the City and its Mission Verde plan, which addresses a wide range of issues affecting the community.

On September 22, 2009, the EPA finalized the nation's first greenhouse gas reporting system and monitoring regulations. On January 1, 2010, the EPA, for the first time, required large emitters of heat-trapping emissions to begin collecting GHG data, under a new reporting system. This new program will cover approximately 85 percent of the nation's GHG emissions and apply to roughly 10,000 facilities. The EPA's new reporting system will provide a better understanding of where GHGs are coming from and will guide the development of policies and programs to reduce emissions. Fossil fuel and industrial GHG suppliers, motor vehicle and engine manufacturers, and facilities that emit 25,000 metric tons or more of CO2 equivalents per year will be required to report GHG emissions data to the EPA annually. The first annual reports for the largest emitting facilities, which include CPS Energy plants, covering calendar year 2010, will be submitted to the EPA in 2011. On March 22, 2010, the EPA proposed a rule to include the reporting of GHG from large sources of fluorinated GHG, which includes SF6. Once the rule becomes final, annual reports covering calendar year 2011 will be submitted to the EPA in 2012.

On September 30, 2009, using the power and authority of the Clean Air Act, the EPA proposed a rule requiring power plants and other large stationary CO2 emitters to have the BACT installed. The new rule would apply to industrial facilities that emit at least 25,000 tons of GHGs each year. That clashes with a Clean Air Act provision calling for regulation of facilities that emit over 250 tons per year. The GHGs covered include CO2, methane, nitrous oxide, hydro- fluorocarbons, fluorocarbons and sulfur hexafluoride. EPA estimated 400 new sources and modifications would be subject to review each year for GHG emissions and, in total, 14,000 sites would have to get permits under the proposal. The administration has not done any calculations on how much emissions the law would cut or the costs to industry. BACT would be decided somewhat on a case-by-case basis, with EPA staff doing technical work to see what the best options are. The most promising technology for fossil generation is carbon capture and storage, but that is at least a decade away from commercial viability. BACT would change over time. Permitting delays and increased Title V permit fees are projected.

The EPA issued a final endangerment finding on December 7, 2009, that GHGs pose a danger to human health and the environment, clearing the way for a Clean Air Act regulation limiting CO2 emissions from power plants, vehicles and other major sources. Power plants and other large stationary sources of CO2 will be required to use BACT to reduce emissions when they modify or construct plants beginning in spring of 2010. Currently, there is no set BACT for power plants; however, the EPA has said it will issue guidance as to what BACT is for GHGs. Once BACT is set, the next time CPS Energy constructs or modifies a plant, our permits will have to include CO2 limits, and we will have to meet those limits using BACT. Currently, there is no commercially available technology to reduce CO2 emissions. The EPA may push for BACT determinations for coal and gas fired generation (new and existing fleet) to meet 50-80% reduction in CO2 through carbon capture and sequestration ("CCS"). As an alternative to reducing CO2 emissions through a removal

69 technology, offsets could be purchased to meet the limits. On December 2009, the EPA denied the petitions to reconsider the Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air Act.

Federal Clean Water Act

The National Pollutant Discharge Elimination System ("NPDES") program is administered by the EPA under the Federal Clean Water Act. The NPDES program provides the framework for monitoring and regulating the discharge of pollutants to surface waters of the United States. The EPA has delegated NPDES authority to the State. The TCEQ administers the Texas Pollutant Discharge Elimination System in cooperation with the EPA to improve water quality on a basin-wide permitting basis. CPS Energy has operated all of its generating facilities pursuant to water discharge permits from both the TCEQ and the EPA for many years with no significant compliance issues.

CPS Energy currently has four individual operating permits for the discharge of industrial waste water to "waters of the United States". The focus of these permits is to reduce discharge of industrial waste and other constituents that could reduce water quality in the San Antonio River basin. The TCEQ and the EPA have developed a list of water quality standards that apply to power plant operations. Although each of CPS Energy's permits is based on the specific operating parameters of the individual power plant, there are some common threads for all of CPS Energy's plant sites.

Water Quality Standards EPA is currently looking at revising water quality standards. Water quality standards were last revised in 1982. EPA completed a multi-year study of the electric power industry and concluded that water discharges had changed significantly over time and that regulation had not kept up with changes in industry. EPA is conducting an Information Collection Request (ICR) asking over 750 power plant owners to complete a lengthy questionnaire designed to better characterize power plant effluent and the impact on industry of changes in water quality standards. CPS Energy is participating in this ICR by completing questionnaires about operations at Calaveras Lake.

EPA has directed regional offices to use their influence with state agencies to force more strict water quality standards even before the new rules are written. CPS Energy has two TPDES permits undergoing the renewal process. EPA has formally challenged renewal of the operating permit for the Braunig Lake plants based on water quality concerns.

Clean Water Act Section 316 (b): The power plants at Braunig and Calaveras Lakes use the lakes as the source for cooling water. Section 316 (b) of the Clean Water Act requires damage to the environment be mitigated and the number of aquatic species injured or killed as the result of plant operation be reduced. The EPA developed specific methods for reduction of impingement and entrainment of aquatic organisms at intake structures. Environmental groups have challenged the suite of technologies developed by the EPA as not reducing impingement enough and challenged the EPA's rulemaking reasoning. Recent court action has invalidated the EPA's rulemaking and remanded the rule to the EPA for reconsideration. As of the fall 2008, the EPA has directed the TCEQ to have each permit writer require impingement reduction technologies be used at individual facilities based on the best professional judgment of the permit writer. CPS Energy has done extensive studies of the impingement at each of its cooling lakes and is currently in the process of evaluating the data. CPS Energy will be working with the TCEQ and the EPA to determine what if any additional measures will need to be taken to assure compliance with the intent of Section 316 (b).

Storm Water: There are numerous storm water outfalls at CPS Energy's plant sites. Storm water is the primary transport method of sediment and pollutants from upland areas to waters of the United States. CPS Energy works in cooperation with the TCEQ and SAWS to improve industrial processes and reduce transport of pollutants from industrial operations to adjacent lakes and streams. Each storm water outfall has specific requirements. In general, the storm water outfalls must be sampled once each six months within two hours of one-half inch rainfall during normal working hours. The goal of monitoring storm water outfalls is to reduce discharge of sediment and pollutants. The primary method of reducing these discharges is good housekeeping and reducing exposure of industrial processes to weather. In general, there can be no visible discharge from any storm water outfall.

Industrial Discharges: Each of the individual permits has numerous parameters that must be monitored for discharges of industrial waste water. Many power plant processes involve water as an active fluid or as a motive fluid. As an active fluid (steam, feed water, condensate water), water is treated with chemicals or comes in contact with power plant equipment that can modify the properties of the water adding dissolved salts and metals. Water can be used for cooling and motive functions. Each step in the process can add impurities to the water. The water must be monitored for impurities and processed to reduce the level of impurities to permitted levels based on the water quality standards established by the EPA and the TCEQ.

70 Water Conservation

The production of electricity is one of the top industrial consumptive uses of fresh water in the United States. San Antonio is the largest metropolitan area in the world that depends exclusively on groundwater for fresh water supply. The Edwards Aquifer is unique for its ability to supply all the fresh water needs of almost two million people in the San Antonio region. CPS Energy recognized the importance of preserving this fresh water resource and began planning to reduce consumption of Edwards Aquifer water for power plant cooling shortly after the drought of record in the 1950's. CPS Energy built Braunig and Calaveras Lakes to utilize treated sewage effluent and runoff waters rather than water from the Edwards Aquifer to maintain operating levels at these man-made cooling lakes. Through 2008, CPS Energy has conserved over 270 billion gallons of Edwards Aquifer water. For these water conservation efforts, the Association of Environmental Professionals selected CPS Energy as one of eight 2001 recipients of the National Environmental Excellence Award. As part of CPS Energy's sustainability efforts, on March 30, 2009, the Board approved a resolution supporting a mutually beneficial cooperative relationship between CPS Energy and SAWS that promotes conservation of both energy and water. Additional information on CPS Energy's sustainability programs can be found in "ENERGY CONSERVATION AND PUBLIC SAFETY PROGRAMS", herein.

Other Environmental Issues

By the early 1990s, CPS Energy completed a program aimed at removing from its system all electrical equipment accessible to the public that was known to contain polychlorinated biphenyls ("PCBs") in concentrations of 500 ppm or greater, as required by the Federal Toxic Substances Control Act. In addition, all oil-filled equipment is tested at the time of servicing as part of an ongoing program at CPS Energy for voluntarily eliminating electrical equipment containing mineral oil with any level of PCBs. Since 1996, in connection with capital improvements being made to many of its substation sites, CPS Energy has identified and remediated areas found to be contaminated by pollutants, such as PCBs. The TCEQ allows the disposal at a local landfill of soil and debris contaminated with 1-49 ppm of PCBs from electrical equipment spills, in lieu of distant disposal sites, resulting in considerable cost savings.

The EPA published an Advance Notice of Proposed Rulemaking (ANPRM) in the Federal Register, seeking both comments and data regarding EPA's intent to curtail and/or eliminate numerous existing provisions of the PCB regulations found at 40 CFR Part 761 (Title 40 of the Code of Federal Regulations Part 761), specifically regarding use, handling, reuse, and storage. The EPA is soliciting information and data relating to PCB inventories, testing data, PCB management accomplishments, servicing practices, failure rates, weather-related incidents, removal and replacement costs, non-liquid PCBs et al. Some believe a proposed rule will be promulgated by 2012, and the final rule will be promulgated by 2014.

CPS Energy also operates its own Class 1 non-hazardous waste landfill, which is registered with the TCEQ, an initiative that reduces disposal costs and CPS Energy's reliance upon off-site disposal facilities. Since 1990, CPS Energy has significantly reduced the amount of hazardous waste (defined under the Federal Resource Conservation and Recovery Act) generated by its operations. CPS Energy also has an extensive recycling program which includes electronics, wood, paper, cardboard, metals, plastic bottles, aluminum cans, used oil, coal-combustion by- products, concrete and asphalt.

The EPA is considering a proposal to regulate coal ash generated during the combustion of coal to produce electricity (referred to as coal combustion byproducts or "CCBs") and classify it as a hazardous waste. Listing CCBs as hazardous waste could have dramatic adverse logistical and cost consequences due to the increases in costs associated with managing and disposing of CCBs. CPS Energy's CCBs have been analyzed and test non-hazardous for the following constituents: mercury, selenium, chromium, cadmium, silver, arsenic, barium and lead. For the past several years, CPS Energy has recycled 100% of its CCBs.

Recent Events

On February 3, 2010, a 30% hydrochloric acid spill occurred at the Calaveras Power Station. A failure in the piping on the aboveground storage tank resulted in the release of 4,200 gallons of 30% hydrochloric acid. The acid spilled into the drainage system, which drains into an oil water separator. It is estimated that approximately 100 gallons of acid mixed with process waters, primarily lake water, discharged into Calaveras Lake. Due to the weak concentration of acid entering the lake, there is no evidence of any danger to aquatic life. As required, the spill was reported to the National Response Center and the Texas Emergency Response Center. In addition, written notification was made to the TCEQ on February 11, 2010. No response has been received from the TCEQ.

71 Ward Transformer Superfund Site

CPS Energy has been named as a Potentially Responsible Party ("PRP") at the Ward Transformer Superfund Site ("Ward Site") in Raleigh, North Carolina. The EPA is directing remediation efforts under the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") to address PCB contamination at the Ward Site stemming from Ward Transformer Company's ("Ward's") transformer repair activities at the Ward Site. Documents relating to CPS Energy's past transactions with Ward suggest that Ward purchased six used three-phase padmount transformers from CPS Energy in 1978, which Ward then rebuilt and sold as refurbished units. CPS Energy is one of nearly 200 entities identified as having sent electrical equipment to Ward for repair or resale; however, based on CPS Energy's limited commercial history with Ward, CPS Energy believes that, at most, it should be treated as a de minimis contributor to the contamination.

The EPA has divided the Ward Site into separate phases investigation and removal activities on the Ward Transformer property itself ("On-site") and similar activities at areas around the Ward Transformer property ("Off-site"). Five companies are currently performing and funding remediation activities at the On-site property ("Performing Parties"). The Performing Parties developed a draft allocation formula to proportionately allocate the remediation expenses they have incurred to the other parties who sent transformers to Ward. The Performing Parties have indicated that they anticipate incurring at least $65 million in cleanup costs for the removal activities. According to the draft allocation, which has been challenged, CPS Energy's share is well under one percent. The Performing Parties offered buyout options to the other parties, which CPS Energy accepted. On July 7, 2009, CPS Energy entered into a Settlement Agreement with the Performing Parties and agreed to pay $359,296. The Settlement Agreement ended CPS Energy's involvement with the Performing Parties for any removal activities On-site, unless additional documents are discovered indicating that CPS Energy sent additional equipment to the Ward Site.

Separate from the activities with the Performing Parties, CPS Energy was one of 60 entities who received a Special Notice Letter ("SNL") from the EPA. The SNL demanded that the recipients provide the EPA with a Good Faith Offer agreeing to reimburse the EPA for its costs and implement the investigation and remediation of the Off-site property. In January 2009, CPS Energy and over 20 other SNL recipients sent the EPA a joint response to the SNL. Negotiations with the EPA concerning the Off-site property are ongoing. CPS Energy has retained legal counsel to assist it in this matter. CPS Energy responded to a CERCLA Section 104(e) Request for Information for the Ward Transformer Superfund Site, Releigh, North Carolina from the EPA in May 2010. On May 5, 2010, CPS Energy submitted a response to the EPA's Request for Information Pursuant to Section 104 of CERCLA and Section 3007 of RCRA for the Ward Transformer Superfund Site.

ENERGY CONSERVATION AND PUBLIC SAFETY PROGRAMS

CPS Energy programs and activities to assist customers in understanding energy and ways to reduce electric and gas usage include:  Comprehensive suite of energy efficiency programs offering rebates and incentives for residential, commercial and industrial customers;  maintaining a special contact number where customers can obtain conservation and other energy-related information;  conducting commercial energy audits;  providing a free comprehensive weatherization and energy efficiency program for low-income customers;  scheduling consumer information exhibits at high-traffic locations such as area shopping malls, trade shows, and other special events;  conducting utility-related presentations for schools, community service organizations, and business and professional groups; and  making available a residential self-energy audit facility on the CPS Energy web site.

In connection with CPS Energy's development of a Strategic Energy Plan that includes energy efficiency as well as generation, CPS Energy has committed to an aggressive, long-term energy efficiency and conservation plan, referred to as STEP. The City Council has partnered with CPS Energy by enacting a building code ordinance to encourage energy efficiency and conservation. In coordination with the new 2010 building codes, CPS Energy is offering incentives for "whole building performance" starting at a minimum of 15% more energy efficient than code. CPS Energy maintains, develops and implements programs and activities, alone and in collaboration with like-minded community entities, which will help achieve annual electrical demand reduction targets that are indexed to the annual growth of electrical demand within the CPS Energy service area. The goal of the STEP Program is to reduce growth in peak electrical demand by 40% in 2010, 50% in 2011 and 60% for the years 2012 through 2020. Reaching these targets will yield peak electrical

72 demand reductions of 771 MW by the end of 2020, an amount equivalent to the electric generation capacity of an electric power plant. Energy efficiency and demand response programs include Peak Saver, which cycles residential air conditioner compressors; residential rebates for both central air conditioners and window units; residential rebates for low-e windows, high efficiency appliances, cool roofs and additional insulation, and commercial and industrial rebates for the installation of energy efficient air conditioners, motors, lighting and roof coatings. CPS Energy has plans to evaluate and increase program offerings annually to target the most effective methods for energy reduction. To facilitate program development, CPS Energy has hired a leading consulting firm and established the Green Ribbon Committee – a community stakeholder input group. It is estimated that the programs will cost approximately $849 million through 2020 and CPS Energy worked with the City of San Antonio to establish a fair and equitable funding mechanism to support these goals. See "CUSTOMER RATES – Fuel and Gas Cost Adjustment" herein.

On January 20, 2009, the Board approved a new Sustainable Energy Policy Statement. While making clear that centralized power plants and the traditional electric utility business model are needed now to bridge the gap to the future, CPS Energy is planning for a future when much of its electricity comes from distributed renewable resources and stored energy, which is distributed on a "smart grid," to customers empowered with the information to better control their own energy cost and consumption.

CPS Energy management plans to develop strategies, goals and policies that will align with this new policy statement and will coordinate with the City of San Antonio on sustainable energy projects. On May 21, 2009, the City Council approved a funding mechanism for the STEP program. See "CUSTOMER RATES – Fuel and Gas Cost Adjustment" herein.

On June 8, 2010 CPS Energy committed to partner in the Texas Sustainable Energy Research Institute at the University of Texas at San Antonio for sustainable energy research. The agreement calls for CPS Energy to invest up to $50 million over 10 years in the institute. The first two years' investment will be $3.5 million, from funds currently allocated to research and development. Future funding will be developed by the scope of the projects defined by the partnership and subject to annual approval by the Board.

The Public Safety Awareness Section ("PSA") provides electric and natural gas safety programs for all age groups. Since its inception in June 1986, the PSA has made 12,850 safety presentations to 2,209,439 contacts within the CPS Energy service area and surrounding counties. During fiscal year 2009-10 the PSA provided 55 programs to 15,638 contacts. In addition to these public relation functions, the PSA works to provide natural gas incident programming with the affected public, government officials, emergency responders and excavators along CPS Energy natural gas routes as required by the TRC and the Department of Transportation, Office of Pipeline Safety guidelines. The PSA works as a liaison with area educational, business, contractors, civic and emergency services organizations to establish strategic alliances that benefit the dissemination of CPS Energy's natural gas and electric safety messages and enhance the utility's reputation as a good corporate citizen.

FUEL SUPPLY

CPS Energy has a diversified generation fuel supply that includes coal, natural gas, nuclear, and fuel oil. CPS Energy purchases natural gas for electric generation and local distribution through its natural gas system on a consolidated basis. Master enabling agreements with natural gas suppliers are reviewed on an ongoing basis to ensure adequate natural gas supplies exist to meet current and future requirements. While coal, natural gas, and nuclear fuel represent the base fuel supply for power generation, certain CPS Energy power plants also have the capability to burn petroleum coke to supplement coal while others can burn fuel oil as an alternate fuel or to supplement natural gas. This dual fuel capability provides greater operational flexibility. Fuel oil can be used for generation, when needed, at the O.W. Sommers and V.H. Braunig Plants and in the new V. H. Braunig Peaking Plants.

Coal is CPS Energy's base energy option, providing 34% of its net annual generation, prior to completion of JKS 2. CPS Energy's units including JKS 2, are designed to use Wyoming Powder River Basin ("PRB") coal. PRB coal is clean, abundant and economical and it is part of CPS Energy's long-range energy plan. Coal is secured through contracts providing both fixed and variable prices that reflect current market conditions. Delivery of PRB coal to CPS Energy occurs on the Union Pacific ("UP") railroad with BNSF Railway having access rights to CPS Energy's coal yard at Calaveras Lake. CPS Energy has favorable long-term contracts with UP. In 2009, CPS Energy resolved outstanding contract issues with UP to assure multi-year coverage of transportation needs for our coal-fired plants. While CPS Energy will take every reasonable step to assure the continuity of its coal supply, CPS Energy cannot predict whether any future coal shipment delays or curtailments could have a material adverse effect on the availability of its coal-fired generating stations.

73 Nuclear is CPS Energy's other base energy option, providing about 35% of its net annual generation. Nuclear fuel procurement for STP is managed by the STPNOC staff with oversight and guidance provided by the Participants. STP fuel supply requires uranium oxide, conversion of oxide to hexafluoride, enrichment of fissile uranium 235 isotope from 0.7% to about 4.5%, design and fabrication of fuel assemblies along with disposal of spent fuel assemblies. Uranium conversion and enrichment are obtained under contracts of several years duration with primary producers. Beyond 2010, through STP's current operating license term, 50% of uranium and conversion requirements are contracted 25% to Areva and 25% to Cameco. Enrichment requirements are contracted with Urenco/LES through STP's current operating license term. Fabrication requirements are contracted with Westinghouse through STP's current operating license term. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System – Used Nuclear Fuel Management" herein.

CPS Energy also owns and operates natural gas transmission facilities, consisting of two larger systems and some short segments connected to power plants. The North Gate Pipeline and the South Gate Pipeline are the two larger systems. The North Gate Pipeline is a 24-inch steel pipeline, which extends 17.2 miles from southern Comal County into northern Bexar County, Texas. Natural gas can be supplied to the pipeline through Energy Transfer's 36-inch Oasis Pipeline and Enterprise Texas Pipeline's ("Enterprise") 30-inch West Texas Pipeline.

The South Gate Pipeline comprises 60.3 miles of 24 and 30-inch steel pipeline, of which 46.9 miles of 30-inch pipeline extends south into Karnes County. A major delivery station in Karnes County connects to the joint venture pipeline owned by Kinder Morgan and Energy Transfer. CPS Energy also operates numerous taps throughout the system connecting to Enterprise, on the North Gate and South Gate Pipelines, and directly into the supply pressure and distribution systems. CPS Energy utilizes its diverse natural gas supply portfolio and interconnects with these pipelines to meet its power plant and distribution requirements.

CPS Energy manages the combined natural gas supply requirements of the power plants and distribution systems through a diversified portfolio of firm and interruptible services with a variety of suppliers. Most of the major natural gas delivery stations are owned by CPS Energy and remotely monitored by the CPS Energy control center, assuring reliable operation. In accordance with the CPS Energy Fuels Management Procedures Policy, designated CPS Energy staff may enter into natural gas supply transactions using master enabling agreements, which incorporate standard commercial terms. CPS Energy has approximately 70 master enabling contracts with natural gas suppliers under which CPS Energy may purchase natural gas requirements. CPS Energy manages firm transportation and storage contracts with Enterprise Texas Pipeline and also manages firm transportation with Houston Pipeline.

Periods of prolonged cold weather, during which natural gas supply may fall short of demand, may necessitate the curtailment of gas use for boiler fuel. The Natural Gas Policy Act subjects intrastate gas, including gas intended for boiler fuel uses, to Presidential emergency purchase authority and emergency allocation authority to assist in meeting interstate natural gas requirements for high priority uses. CPS Energy's gas supply has not been curtailed by its major suppliers since 1983. Nevertheless, CPS Energy's gas supply is subject to the ability of its gas suppliers to make available sufficient quantities of supply, as well as fluctuations in market prices.

CPS Energy maintains fuel oil supplies at certain capable generating units. At these plants CPS Energy maintains fuel oil inventory and fuel oil receipt by truck. CPS Energy also maintains receipt capability by pipeline at the V.H. Braunig facility. Inventory and receipt capability at these plants assures continued operation during natural gas supply disruptions or price events.

The Energy Price Risk Management Policy was implemented in 2002 to reduce the effects of energy price volatility consistent with this policy. At times, financial derivative instruments are utilized to hedge natural gas prices. See "WHOLESALE POWER MARKETING" and "ENTERPRISE RISK MANAGEMENT" herein.

On June 21, 2007, CPS Energy entered into a prepaid natural gas transaction with SA Energy Acquisition Public Facility Corporation ("SAEA" or "PFC"), a non-profit public facility corporation previously created by the City pursuant to Chapter 303, as amended, Texas Local Government Code. This transaction enabled CPS Energy to purchase a 20-year supply of natural gas to cover approximately 20,000 MMBtu per day. This gas is dedicated for use in CPS Energy's gas distribution system and CPS Energy's obligation in this transaction is limited to a take-and-pay gas purchase agreement, obligating CPS Energy to pay a monthly index-based price less a fixed discount for delivered gas. The PFC prepaid for this gas by issuing $644,260,000 of tax-exempt fixed rate bonds and used the proceeds to make the payment to the natural gas supplier. This prepaid gas transaction was supported by its own official statement issued by the PFC fully disclosing the transaction and related risks.

Multiple PFC debt credit rating changes resulted as a direct consequence of Goldman Sachs Group, parent of the natural gas supplier J. Aron, having their credit ratings lowered by each rating agency. The PFC debt credit ratings were lowered in December 2008 and January 2009 by Fitch Ratings ("Fitch"), Moody's Investors Service, Inc. ("Moody's"), and 74 Standard & Poor's Ratings Services, a Standard & Poor's Financial Services LLC business ("S&P"). On December 17, 2008, Moody's lowered the PFC debt credit ratings from "Aa3" to "A1" and on December 19, 2008 S&P lowered the PFC debt credit ratings from "AA-" to "A". On December 30, 2008, the authorized representatives of the PFC posted a material event notice through the MAC (defined herein), as required by Rule 15c2-12 of the United States Securities and Exchange Commission ("SEC"), disclosing these two credit rating changes. Subsequently, on January 28, 2009, Fitch lowered the PFC debt credit ratings from "AA-" to "A+" and the authorized representatives of the PFC posted a second material event notice through the MAC on February 4, 2009. On February 4, 2009, Moody's lowered the PFC's credit ratings to "A2" as a result of DEPFA's credit ratings being lowered. This downgrade, only recently discovered by CPS Energy during the course of independent due diligence and not notified thereof by Moody's, will be the subject of a material event notice to be filed with EMMA not later than November 30, 2010. The PFC's credit ratings are currently rated by Fitch, Moody's and S&P at "A+", "A2", and "A", respectively.

Recently Moody's and Fitch lowered the ratings assigned to DEPFA BANK, with which the PFC invests funds used to pay its debt service, to "Baa3/P-3", and "BBB+/F-2", respectively, and Moody's put the PFC's credit rating on watch for a possible future downgrade. The lowering of the PFC's credit ratings does not change the day-to-day operations of the PFC and has no impact on CPS Energy's credit ratings. CPS Energy continues to purchase and receive natural gas at the discounted price. However, if a party providing funds (or gas to be sold to produce funds) used to pay the PFC's debt were to default, the PFC's debt could be accelerated and its gas supply agreement could be terminated, thereby eliminating future fuel expense savings passed through to CPS Energy customers.

CPS Energy, via SAEA, is currently negotiating the purchase of a natural gas volumetric production payment ("VPP") from Wells Fargo Bank, N.A. ("WF"), representing approximately 41 billion cubic feet over a term of 8.5 years. A VPP is a lower risk form of natural gas reserve ownership in a producing asset, which is sold for a specific gas volume with priority interest in a reserve to be produced over a term. Gas produced in Texas and delivered to the PFC under the VPP will be provided to CPS Energy for use for its customers, and will qualify for production tax exemption. The exemption will result in a discounted price to CPS Energy for the life of the VPP, currently estimated at a net present value savings of $7 million. Savings will be passed on to CPS Energy natural gas distribution customers through the monthly fuel adjustment clause. Financing for the VPP acquisition will be provided by a consortium of banks via a non-recourse loan to SAEA and is expected to close in late fall 2010.

LEASE TRANSACTION

The City is a party to a transaction, entered into in June 2000, involving its JKS 1, pursuant to which such facility is subject to a variety of contractual arrangements, including a lease agreement ("Lease"), with CPS Energy as lessee. This Lease transaction was complex, involved voluminous documentation and numerous parties, and the discussion herein is provided primarily for the purpose of providing information concerning the current potential financial impact on CPS Energy from this Lease transaction as disclosed in the following paragraph. See also "Appendix B – City Public Service – Audited Financial Statements" (page B-64) herein for certain financial disclosure about the Lease transaction. The term of the Lease expires in March 2032. As security for its obligations under the Lease, CPS Energy obtained (a) a payment undertaking agreement guaranteed by American International Group, Inc. which is additionally secured by a pool of United States government securities ("AIG Collateral") and (b) a financial guaranty issued by Financial Security Assurance Inc., since succeeded in legal interest by Assured Guaranty Municipal Corp. ("AGM") (defined below). The Lease transaction documents require that, in the event the senior unsecured credit rating of AGM falls below "AA-" from S&P or "Aa3" from Moody's, CPS Energy is required to replace the financial guaranty with a similar collateral instrument issued by a provider having such minimum (or in the case of certain providers, higher) ratings. AGM is currently rated "AA+" (stable outlook) and "Aa3" (negative outlook) by S&P and Moody's, respectively. CPS Energy, working with its financial advisors, is evaluating various options to potentially unwind this transaction and/or find a replacement surety provider in the event of a further downgrade of AGM.

Additional information on the acquisition of FSA by AGM can be found in "LEASE TRANSACTION – Acquisition of FSA by AGM, Recent Developments Concerning AGM, and Company Capitalization" herein. Given current financial market conditions, in the event such a AGM credit downgrade occurs, it could be difficult for CPS Energy to substitute another collateral provider with the required minimum credit ratings. If CPS Energy was able to identify a suitable provider, a significant premium could be payable. Failure to replace this provider as required could ultimately constitute an event of default under the Lease and permit the lessor to terminate the transaction and demand that CPS Energy make a termination payment, which may only partially be covered by the AIG Collateral. See discussion under the caption "POTENTIAL EXCISE TAX ADVERSELY AFFECTING THE CITY AND CPS ENERGY".

In addition to the foregoing exposure by AGM, AGM is the provider of a debt service reserve fund surety policy satisfying a portion of the reserve requirement attributable to the Senior Lien Obligations and any Additional Senior Lien 75 Obligations. This policy provides coverage in the amount of $275,000,000 and has a stated expiration date of February 1, 2042.

Acquisition of FSA by AGM, Recent Developments Concerning AGM, and Company Capitalization

AGM is a New York domiciled financial guaranty insurance company and a wholly owned subsidiary of Assured Guaranty Municipal Holdings Inc. ("Holdings"). Holdings is an indirect subsidiary of Assured Guaranty Ltd. ("AGL"), a Bermuda-based holding company whose shares are publicly traded and are listed on the New York Stock Exchange under the symbol "AGO". AGL, through its operating subsidiaries, provides credit enhancement products to the U.S. and global public finance, infrastructure and structured finance markets. No shareholder of AGL, Holdings or AGM is liable for the obligations of AGM.

Effective November 9, 2009, Financial Security Assurance Inc. changed its name to Assured Guaranty Municipal Corp.

AGM’s financial strength is rated "AA+" (stable outlook) by S&P and "Aa3" (negative outlook) by Moody’s. On February 24, 2010, Fitch, at the request of AGL, withdrew its "AA" (Negative Outlook) insurer financial strength rating of AGM at the then current rating level. Each rating of AGM should be evaluated independently. An explanation of the significance of the above ratings may be obtained from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold any security, and such ratings are subject to revision or withdrawal at any time by the rating agencies, including withdrawal initiated at the request of AGM in its sole discretion. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of any security guaranteed by AGM. AGM does not guarantee the market price of the securities it insures, nor does it guarantee that the ratings on such securities will not be revised or withdrawn.

Current Financial Strength Ratings

On October 25, 2010, S&P published a Research Update in which it downgraded AGM’s counterparty credit and financial strength rating from “AAA” (negative outlook) to "AA+" (stable outlook). Reference is made to the Research Update, a copy of which is available at www.standardandpoors.com, for the complete text of S&P’s comments.

In a press release dated February 24, 2010, Fitch announced that, at the request of AGL, it had withdrawn the "AA" (Negative Outlook) insurer financial strength rating of AGM at the then current rating level. Reference is made to the press release, a copy of which is available at www.fitchratings.com, for the complete text of Fitch’s comments.

On December 18, 2009, Moody’s issued a press release stating that it had affirmed the "Aa3" insurance financial strength rating of AGM, with a negative outlook. Reference is made to the press release, a copy of which is available at www.moodys.com, for the complete text of Moody’s comments.

There can be no assurance as to any further ratings action that Moody’s or S&P may take with respect to AGM.

For more information regarding AGM’s financial strength ratings and the risks relating thereto, see AGL’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009, which was filed by AGL with the Securities and Exchange Commission (the "SEC") on March 1, 2010, AGL’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010, which was filed by AGL with the SEC on May 10, 2010, and AGL’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010, which was filed by AGL with the SEC on August 9, 2010.

Capitalization of AGM

At June 30, 2010, AGM’s consolidated policyholders' surplus and contingency reserves were approximately $2,264,680,337 and its total net unearned premium reserve was approximately $2,259,557,420, in each case, in accordance with statutory accounting principles.

Incorporation of Certain Documents by Reference

Portions of the following documents filed by AGL with the SEC that relate to AGM are incorporated by reference into this Official Statement and shall be deemed to be a part hereof:

76  The Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (which was filed by AGL with the SEC on March 1, 2010);

 The Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2010 (which was filed by AGL with the SEC on May 10, 2010); and

 The Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010 (which was filed by AGL with the SEC on August 9, 2010).

All information relating to AGM included in, or as exhibits to, documents filed by AGL pursuant to Section 13(a), 13(c) or 15(d) of the Securities Exchange Act, as amended, after the filing of the last document referred to above and before the termination of the offering of the Bonds shall be deemed incorporated by reference into this Official Statement and to be a part hereof from the respective dates of filing such documents. Copies of materials incorporated by reference are available over the internet at the SEC’s website at http://www.sec.gov, at AGL’s website at http://www.assuredguaranty.com, or will be provided upon request to Assured Guaranty Municipal Corp. (formerly known as Financial Security Assurance Inc.): 31 West 52nd Street, New York, New York 10019, Attention: Communications Department (telephone (212) 826-0100).

Any information regarding AGM included herein under the caption “LEASE TRANSACTION – Acquisition of FSA by AGM, Recent Developments Concerning AGM, and Company Capitalization” or included in a document incorporated by reference herein (collectively, the “AGM Information”) shall be modified or superseded to the extent that any subsequently included AGM Information (either directly or through incorporation by reference) modifies or supersedes such previously included AGM Information. Any AGM Information so modified or superseded shall not constitute a part of this Official Statement, except as so modified or superseded.

AGM makes no representation regarding the Bonds or the advisability of investing in the Bonds. In addition, AGM has not independently verified, makes no representation regarding, and does not accept any responsibility for the accuracy or completeness of this Remarketing Memorandum or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding AGM supplied by AGM and presented under the heading “LEASE TRANSACTION – Acquisition of FSA by AGM, Recent Developments Concerning AGM, and Company Capitalization”.

POTENTIAL EXCISE TAX ADVERSELY AFFECTING THE CITY AND CPS ENERGY

The Tax Increase Prevention and Reconciliation Act of 2005, enacted on May 17, 2006, added section 4965 ("Section 4965") to the Internal Revenue Code, as amended ("Code"), which imposes an excise tax with respect to "prohibited tax shelter transactions" on certain "tax-exempt entities", including a state or political subdivision thereof, such as the City that is a "party to a prohibited tax shelter transaction". CPS Energy, acting for the benefit of the City, entered into a series of leasing transactions ("Transactions") in 2000, which may be considered prohibited tax shelter transactions. As a result of guidance issued by the Internal Revenue Service in 2007, CPS Energy has determined that Code rules currently do not retroactively apply to the Transactions. CPS Energy and its advisors will continue to analyze any additional regulations and any future guidance to ensure that the Transactions remain exempt from any new tax liability.

LITIGATION

The City of San Antonio

This section describes the litigation involving the City that does not directly involve CPS Energy or claims payable out of Systems revenues. Please see "LITIGATION – Systems Litigation and Claims" herein for a description of litigation involving CPS Energy.

The City is a defendant in various lawsuits and is aware of pending claims arising in the ordinary course of its municipal and enterprise activities, certain of which seek substantial damages. That litigation includes lawsuits claiming damages that allege that the City caused personal injuries and wrongful deaths; class actions and promotional practices; various claims from contractors for additional amounts under construction contracts; and property tax assessments and various other liability claims. The amount of damages in most of the pending lawsuits is capped under the Texas Tort Claims Act. Therefore, as of fiscal year ended September 30, 2009, the amount of $18.497 million is included as a component of the Reserve for claims liability. The estimated liability, including an estimate of incurred but not reported claims, is recorded in the Insurance Reserve Fund. The status of such litigation ranges from early discovery stage to various levels 77 of appeal of judgments both for and against the City. The City intends to defend vigorously against the lawsuits, including the pursuit of all appeals; however, no prediction can be made, as of the date hereof, with respect to the liability of the City for such claims or the outcome of such lawsuits.

In the opinion of the City Attorney, it is improbable that the lawsuits now outstanding against the City could become final in a timely manner so as to have a material adverse financial impact upon the City. The City provides the following updated information related to the lawsuits:

Brooks Hardee, et al. v. City of San Antonio; Reed Lehman Grain, Ltd. v. City of San Antonio; Farmco Trust et al. v. City of San Antonio, et al. These are similar cases brought by the same developer/landowner under different entities. These cases raise complex issues of fact and law and, collectively, challenge the City's authority to regulate land development, including challenging the City's vested rights determinations for the landowner's projects. The City's legal team is confident that many of the allegations are without merit and the number of resolved cases illustrates the City's strong positions. The City has coordinated its defense with SAWS.

CKW, Inc., et al. v. City of San Antonio, et al. In this case, multiple Plaintiffs claim damages for alleged inverse condemnation, takings, and "constitutional damages" due to a road-widening project. This case is related to several other cases arising out of the same project. The claims aggregate well over $100,000. This case is not yet set for trial.

Erin McCutcheon v. Sheryl Sculley, et. al. Plaintiff was arrested by a San Antonio Police Department ("SAPD") officer for a public disturbance at a night club. Plaintiff has filed suit against the officers, the City and the night club, alleging use of excessive force by the officers. The City has been dismissed from the suit. Damages could exceed $200,000. The case is stayed by the judge pending Plaintiff's criminal case.

Kopplow Development, Inc. v. City of San Antonio. Plaintiff contends that the construction of a regional stormwater detention facility was an inverse condemnation of its property by increasing the flood plain elevation on its property. The City also filed a statutory condemnation to acquire an easement involving Plaintiff's property to construct and maintain part of the facility. This matter was tried in July 2008, resulting in a judgment against the City of approximately $2 million and an adverse ruling to the City on Plaintiff's claim of vested development rights. The City's motion for new trial was granted. After a retrial, the Court ruled that Plaintiff does not have vested rights with respect to flood plain development, and the jury awarded approximately $600,000 to Plaintiff for the inverse condemnation and statutory condemnation. The City and Plaintiff have appealed.

Shawn Rosenbaum, et. al. v. City of San Antonio, et. al. Plaintiff's decedent, Diane Rosenbaum, was operating her motorized wheelchair, crossing a parking area where she allegedly was struck by a City vehicle.. Ms. Rosenbaum later died, allegedly as a result of this incident. This case is recently filed and discovery is on-going. Damages in this matter are capped by the Texas Tort Claims Act at $250,000.

Daniel Thomas, et. al. v. City of San Antonio, et. al. Plaintiffs' decedent was involved in two vehicle accidents in a short period of time and fled the scene of the second one on foot. After decedent refused commands to stop and drop his weapon, and in fear for their safety, the officers shot and killed the decedent. Plaintiffs filed suit against the City and the officers in their individual capacities. Discovery is on-going. If liability is determined, damages could be in excess of $250,000.

Chacon, et. al. v. City of San Antonio, et. al. Plaintiffs are land owners who own property in an area that had been part of a limited purpose annexation by the City. The area was deannexed in March 2008 and City South Management Authority ("CSMA") took over responsibility for planning and zoning pursuant to State statute. Plaintiffs challenge both the City and CSMA's authority to enact and enforce zoning and planning regulations, alleging that these restrictions have devalued their property by limiting their ability to develop it. Plaintiffs seek damages in excess of $4 million.

Galvan, et al. v. City of San Antonio, et al. Plaintiffs filed suit for wrongful death under State and federal laws related to the death of Sergio Galvan. During the course of an arrest, decedent became violent and, in response, the defendant officers used taser guns to subdue him. Decedent became unresponsive and was later pronounced dead. The trial court granted summary judgment in favor of all defendants in November 2008. Plaintiffs have appealed the judgment with respect to the defendant officers to the Fifth Circuit Court of Appeals. Briefing and oral argument has been completed. A second lawsuit was filed by different family members of the decedent, in State district court.

Smith, et al. v. Ybarra, et al. Plaintiffs' decedent was killed in a motor vehicle accident. Plaintiffs filed suit against the driver of the vehicle involved, as well as the City. As to the City, plaintiffs contend that paramedics did not render medical aid to decedent based on their mistaken belief that she was already dead. Damages could be up to $250,000.

78 Vargas v. City of San Antonio, et al. Plaintiff alleges that a police officer improperly used a police vehicle to pin and injure minor plaintiff against a utility pole. Plaintiff filed suit alleging excessive force. A new scheduling order has been filed and parties are awaiting a new trial setting.

Wissmann v. City of San Antonio. Plaintiff was involved in a motor vehicle accident with a police cruiser. Plaintiff claims injuries to her back, neck, both legs and body. This case is covered by the Texas Tort Claims Act. If liability is determined, damages could be in excess of $250,000.

KGME, Incorporated v. City of San Antonio. Plaintiff entered into a contract with the City to provide construction services. The parties determined that work on portions of the contract had become impracticable and further work would cease. Plaintiff sued for Breach of Contract and Violations of the Prompt Payment Act. Damages could exceed $250,000.00. The City filed a plea to the jurisdiction, which was denied by the Court. The City has appealed to the Fourth Court of Appeals.

Vasquez, et al. v. City of San Antonio Police Department. Plaintiffs were involved in a motor vehicle accident while pursued by SAPD officers. Plaintiff filed suit on her behalf and on behalf of her minor child for injuries allegedly sustained in the accident. This case is covered by the Texas Torts Claims Act. If liability is determined, damages could be in excess of $250,000. This case has not been set for trial.

Rosemary Flammia v. City of San Antonio. Plaintiff initially filed an EEOC complaint alleging discrimination based on gender and race based on not being appointed as Assistant Chief and amended her complaint on several occasions She also asserted claims of retaliation based on her prior EEOC filings. Expenses in this case could exceed $250,000.

David Ash v. City of San Antonio. Plaintiff struck a City vehicle from behind. Plaintiff claims he could not see that the City vehicle was stopping because of the dust cloud kicked up by the truck. This case was tried to a jury in September 2009 and Plaintiff was awarded damages of approximately $190,000. This case is currently on appeal. If the verdict is upheld, the damages, plus interests and legal expenses to the City, is likely to reach or exceed $250,000.

Paez, et al v. City of San Antonio. Plaintiffs sued under the Texas Torts Claims Act for negligence, gross negligence, and wrongful death alleging that Sergeant Gabriel Trevino negligently struck and killed Rosita Davila in a motor vehicle accident on Loop 1604 on March 7, 2010. Many depositions have been taken as discovery is still in progress. This case is set for trial on February 7, 2011.

Systems Litigation and Claims

CPS Energy is involved in various legal proceedings related to alleged personal and property damages, condemnation appeals and discrimination cases. As the operator of San Antonio's gas and electric systems, various claims have been asserted against CPS Energy. Most of those claims, including those in active litigation, do not merit individual disclosure and, in all cases, except where mentioned below, CPS Energy maintains a litigation reserve that is sufficient to satisfy reasonable outcomes concerning these pending claims and litigation. Subject to the foregoing, CPS Energy separately discloses certain pending litigation and potential claims, as follows:

American Empire Surplus Lines Insurance Co. v. City of San Antonio. This is a subrogation claim in which Plaintiff is suing CPS Energy and alleging that property and buildings of its subrogor were damaged by an electrical explosion and fire that Plaintiff alleges emanated from CPS Energy's transformer and electric lines. Plaintiff claims damages in excess of $500,000. CPS Energy denied Plaintiff's allegations and claims. Discovery is on-going and the case is set for trial on April 18, 2011.

Casey Industrial, Inc. v. City of San Antonio. CPS Energy was sued by Casey Industrial, Inc. ("Casey"), relating to Casey's work on the design build contract for CPS Energy's J.T. Deely Baghouse Project, on which Casey and Wheelabrator Air Pollution Control, Inc. ("Wheelabrator") were contractors. Casey alleges that it is due additional compensation because of delays in receiving engineering from Wheelabrator and because of additional work that Casey performed, which, in Casey's view, was not part of the scope in Casey's original bid. Casey has claimed that it is owed approximately $12,000,000 based on its claims. CPS Energy answered the lawsuit, denying Casey's claim, and asserted a $1,600,000 counter-claim for work unperformed by Casey. Discovery is on-going and a trial date is set for May 9, 2011.

Time Warner Cable San Antonio, L.P. v. City Public Service of San Antonio. Texas law prohibits discrimination by a municipally owned utility ("MOU") in the rates and terms the MOU charges a certificated telecommunications provider ("CTP") for the attachments the CTP makes to an MOU's poles and, beginning September 1, 2006, requires the MOU charge a single, uniform pole attachment rate to all CTPs. Beginning with its 2007 invoices, CPS Energy has charged all 79 CTPs the same rate. AT&T claims its pole attachment agreement with CPS Energy requiring joint ownership of poles exempts it from the requirement; CPS Energy continues its attempts to collect the outstanding balance and AT&T has continued to pay the significantly lower pole attachment rate provided by its 20-year contract. Time Warner Cable San Antonio, L.P. ("TWC") has brought suit against CPS Energy in State district court in San Antonio, claiming CPS Energy's failure to collect the outstanding balance from AT&T is in violation of the statutory requirement and that CPS Energy has discriminated against TWC by charging TWC and AT&T different pole attachment rates. TWC seeks damages of no less than $5 million. CPS Energy responded to the lawsuit by asking the court to abate the lawsuit because the PUC has primary jurisdiction over the issues raised by TWC and should be allowed to rule on the issues raised in a PUCT docket CPS Energy filed, Petition of CPS Energy for Enforcement Against AT&T and Time Warner Cable Regarding Pole Attachments, Docket No. 36633. CPS Energy also counter-sued for TWC's outstanding balance, which has resulted from TWC paying for its pole attachments at the 20-year-old AT&T rate instead of the 2008 rate CPS Energy is uniformly charging all CTPs for pole attachments. By order issued March 17, 2009, the court abated the proceeding pursuant to CPS Energy's request. Consistent with CPS Energy's request, on April 3, 2009, the PUC issued an order assuming jurisdiction over the case. The State Office of Administrative Hearings will hear CPS Energy's docket on November 15-17, 2010, and the PUCT Commissioners are expected to issue an order in early to mid 2011.

Pedro Gonzalez v. City of San Antonio, et al. The Plaintiff sued CPS Energy for wrongful termination based on gender discrimination. CPS Energy claimed that it terminated the Plaintiff for legitimate, non-discriminatory reasons. The case was tried to a jury verdict. On August 15, 2008, the court entered a judgment against CPS Energy after the jury returned an adverse verdict and awarded the Plaintiff approximately $668,000.00 in damages, fees, and costs against CPS Energy. CPS Energy filed a variety of post-trial motions, as well as an appeal. On appeal, the 4th Court of Appeals reversed and rendered overturning the lower court decision and ordered that Plaintiff take nothing from CPS Energy. The Plaintiff then filed a petition for review with the Texas Supreme Court which was denied on October 2, 2010. Therefore, the Court of Appeals decision in CPS Energy's favor will stand.

Beverly Harvey Lay, Individually and as Personal Representative of the Heirs and Estate of Arthur L. Lay, Jr. v. A. W. Chesterton, et al. CPS Energy was sued, along with thirty-five other defendants, by Ms. Beverly Lay who alleges that her deceased husband, Arthur L. Lay, a former CPS Energy power plant employee who retired with over twenty-five years of service, was exposed to asbestos-containing products, contracted mesothelioma and died shortly thereafter. Each named defendant is alleged to be jointly and severally liable under the doctrines of enterprise liability, market share liability, concert of action, and alternative liability. Mr. Lay, as an employee of CPS Energy, had Worker’s Compensation Insurance coverage at the time. As such, Ms. Lay will be required to prove gross negligence in order to attribute any liability to or collect monetary damages from CPS Energy. While exposure could be potentially high if liability were imposed, proving gross negligence against CPS Energy will be extremely difficult. CPS Energy has successfully defended this type of claim in the past and this case will be vigorously defended.

Ricky Spriggs v CPS Energy and Badeco On June 29, 2009, Ricky Lee Spriggs, an employee of Dean Word Company, a contactor working on a project for the Texas Department of Transportation ("TXDOT"), was operating a milling machine. As his equipment was cutting the road at that location, it came into contact with an eight-inch pressurized natural gas supply line owned by CPS Energy. This contact resulted in a broken line causing the gas to leak and ignite. Mr. Spriggs sustained burns and required hospitalization. A lawsuit was filed by Mr. Spriggs against CPS Energy and Badeco, Inc., a subcontractor of Mr. Spriggs’s employer. CPS Energy filed its answer in June of 2010 and discovery is ongoing. While it is too early to adequately and accurately assess Mr. Spriggs’ damages and the liability of the various parties involved, CPS Energy has put its excess insurance carrier on notice as a precautionary measure and will vigorously defend this lawsuit. The initial trial date is set for May 2, 2011.

Public Utility Commission of Texas v. Constellation Energy Commodities Group, Inc. On November 14, 2006, Constellation Energy Commodities Group, Inc. (Constellation) filed a complaint at the Public Utility Commission (Commission) against the Electric Reliability Council of Texas (ERCOT) relating to ERCOT’s settlement for replacement reserve service (RPRS) under-scheduled capacity charges. The Commission denied Constellation’s complaint, finding that Protocol §§ 6.6.3.2.1 and 6.9.2.1.1 did not conflict but were in harmony, that ERCOT correctly settled the capacity insufficiency charges for the disputed dates in accordance with the Protocols then in effect, and that no resettlement should occur. The Commission determined that subsection (6) of Protocol § 6.6.3.2.1 addressed capacity insufficiencies and provided a factor for insufficiency that was included in the formula for calculating charges to under- scheduled qualified scheduling entities (QSEs) on a zonal basis in Protocol § 9.9.2.1.1. The Commission further determined that ERCOT correctly applied the formula as written at that time, that a Protocol Revision Request (PRR) was later utilized to modify the Protocol to avoid the consequences of applying the zonal factor as the formula previously required, and the decision comported with Protocol § 1.1, the purpose of which is to preclude the retroactive application of a protocol revision to a settlement period that predates the revision. Constellation appealed the Commission’s decision to state district court in Travis County. The Commission, ERCOT, and a number of market participants, including CPS Energy, intervened in the appeal in support of the Commission’s position. On June 19, 2009, the district court 80 reversed the Commission, finding that there was conflict in the Protocol provisions, and ordered that ERCOT resettle the timeframe at issue. The Commission and the intervenors appealed this decision to the Third Court of Appeals, which heard the Commission’s appeal on October 6, 2010. If the district court’s finding is upheld, this would not result in a judgment of any kind against CPS Energy but would instead require that ERCOT order a resettlement of the market. CPS Energy and other market participants would have to reimburse Constellation and other under-reporting entities for charges ERCOT collected from them during the relevant timeframe. It is difficult to quantify the impact on CPS Energy if this resettlement were to be required, as it would require a determination by ERCOT of which market participants paid RPRS under-scheduled capacity charges, how much each paid, and how much each will receive from those market participants that were not assessed RPRS under-scheduled capacity charges.

On the date of delivery of the Bonds to the Underwriters, the City will execute and deliver to the Underwriters a certificate to the effect that, except as disclosed herein, no litigation of any nature has been filed or is pending, as of that date, to restrain or enjoin the issuance or delivery of the Bonds or which would affect the provisions made for their payment or security or in any manner question the validity of the Bonds.

WHOLESALE POWER MARKETING

Beginning in 1997, CPS Energy initiated an active program to market its excess generation capacity in the wholesale power market. CPS Energy's power marketing strategy also includes purchasing power if the cost of such power is below what it would cost for CPS Energy to supply the energy from its own generation units. CPS Energy may also purchase power if there is an unanticipated deficit in capacity, to maintain planning reserve margins, to enhance reliability for the electric system, or when economically prudent to reduce overall costs of its obligations in the ERCOT market. CPS Energy buys power only for CPS Energy customer load requirements and does not sell power in excess of its available generation capacity. Certain exceptions exist, such as during times of forced outages, etc. CPS Energy's sales and purchase volumes represent less than 15% of CPS Energy's generation volumes.

Trained, experienced staff in CPS Energy's Wholesale Power Marketing Division, who report to the CPS Energy Senior Vice President for Energy Development, conduct wholesale power transactions in accordance with established procedures. Any deviation from current operating procedures related to purchases or sales of energy must be reported to management and, depending on the deviation, also to the Board.

CPS Energy conducts wholesale power transactions only with approved counterparties with which CPS Energy has established master enabling agreements for such transactions, or with ERCOT itself, in the case of balancing energy and ancillary services. The enabling agreements outline the general payment and delivery terms and conditions of such sales and purchases, and provide for written transaction confirmations to be exchanged between CPS Energy and its counterparts for each transaction.

ENTERPRISE RISK MANAGEMENT

In June 1998, CPS Energy established a Risk Management Department under the direction of the Executive Vice President and Chief Financial Officer. The department's initial focus was on establishing an insurance program to address CPS Energy's internal risks as well as exposures created by third parties, such as vendors and contractors.

In 2002, as part of its risk management and fuel and electricity purchasing policies, CPS Energy obtained the ability to utilize certain financial derivative instruments, such as energy-based futures, options and swap contracts to hedge or mitigate price volatility associated with fuel and energy sales and purchases. The hedge program is operated in accordance with a written policy approved annually by the Board. A program oversight committee composed of CPS Energy corporate officers and senior executives approves operating policies and corporate hedging strategies.

As part of its continued expansion, the Risk Management Department began working closely with the Wholesale Energy Markets staff to provide credit risk assessments and on-going monitoring of existing and potential counterparties. Capabilities in this area continue to expand. In April 2006, a Chief Risk Officer was brought on board to formalize an enterprise-wide approach to monitor CPS Energy's financial and non-financial risk management efforts. The department was renamed Enterprise Risk Management ("ERM"). ERM continuously monitors all counterparties and credit related exposure on a daily basis. In addition, the ERM department now reports to the President & CEO rather than the Chief Financial Officer, to more fully reflect the enterprise-wide focus on risk management.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010. Title VII of the Dodd-Frank Act, known as the "Wall Street Transparency and Accountability Act of 81 2010," substantially modified portions of the Commodity Exchange Act with respect to swaps and swap transactions. The law is designed to reduce risk, establish new business conduct rules, increase transparency, and promote market integrity within the financial system. The Dodd-Frank Act gives both the Commodity Futures Trading Commission ("CFTC") and U.S. Securities and Exchange Commission ("SEC") statutory authority to directly regulate the "Over the Counter" (or OTC) derivatives market, including many of the commodities that are currently being traded or hedged by CPS Energy in accordance with its own policies and procedures. The CFTC and SEC are in the process of proposing new rules pursuant to this new legislation and, as a result, its overall impact on CPS Energy is uncertain at this time.

INVESTMENTS

Operating Funds

CPS Energy invests its operating funds as authorized by its bond and commercial paper ordinances and by federal and Texas law including, but not limited to, the Public Funds Investment Act, as amended, Chapter 2256, Texas Government Code ("Investment Act"), Chapter 272, as amended, Texas Local Government Code, and in accordance with written investment policies approved by the Board. These ordinances, laws and CPS Energy's investment policies are subject to change.

Under current Texas law and the investment policies approved by the Board, CPS Energy may invest its funds in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued and guaranteed by a Federal agency or instrumentality of the United States; (4) other obligations, the principal and interest of which are unconditionally guaranteed or insured by Texas or the United States or their agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated not less than "A" or its equivalent; (6) a certificate of deposit or share certificate which is fully secured and/or federally insured; (7) securities lending programs that are 100-102% collateralized; (8) fully collateralized repurchase agreements; (9) certain bankers' acceptances; (10) commercial paper rated not less than "A-1" or "P-1" or equivalent and that have a stated maturity of 270 days or fewer from the date of issuance; (11) no-load money market mutual funds that have a dollar weighted average stated maturity of 90 days or less, and include in their investment objectives the maintenance of a stable net asset value of $1 for each share; (12) certain no-load mutual funds that are rated at least "AAA" or its equivalent; (13) certain guaranteed investment contracts that are funded by bond proceeds if authorized in the order, ordinance, or resolution authorizing the issuance of the bonds; (14) investment pools that stabilize at a $1 net asset value to the extent reasonably possible and are rated no lower than "AAA" or "AAA-m" or equivalent; (15) in connection with a transaction authorized by Section 272.004 of the Local Government Code, one or more of the investments, securities, guarantees, and/or insurance contracts or other contracts and agreements described in Section 452.108(d) of the Texas Transportation Code, including, but not limited to the following: payment agreements, financial guarantees or insurance contracts with counterparties having either a corporate credit or debt rating in any form, a claims-paying ability, or a rating for financial strength of "AA" or better and (16) hedging instruments authorized by Section 2256.0201 of the Texas Government Code and in accordance with CPS Energy's Energy Price Risk Management Policy for the purpose of managing risks of financial uncertainty or loss associated with adverse volatility in the pricing of CPS Energy's energy and fuel assets, to include energy based futures contracts, option contracts, swap contracts, insurance contracts, and structured contracts composed of combinations of hedging instruments.

CPS Energy is specifically prohibited from investing its funds in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage- backed security collateral and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity date of greater than 10 years; and (4) collateralized mortgage obligations, the interest rate of which is determined by an index that adjusts opposite to the change in the market index.

The weighted term to maturity of investments at July 31, 2010, was 1 year 29 days for CPS Energy's funds. CPS Energy's funds, as of July 31, 2010, were invested entirely in Government Agency Obligations held in book-entry form by the Federal Reserve, collateralized mortgage obligations directly issued by and guaranteed by a Federal agency, money market mutual funds, fully collateralized or insured certificates of deposit, fully collateralized repurchase agreements, high quality municipal bonds and money market deposit funds. The market value of the investments held totaled approximately $1.044 billion (unaudited). Based on market value, 68% of the portfolio was invested in United States Government Agency Obligations, 15% in money market mutual funds, 6% in fully collateralized or insured certificates of deposit, 5% in fully collateralized repurchase agreements, 3% in collateralized mortgage obligations backed by Federal agencies, 2% in high-quality municipal bonds and less than 1% in money market deposit funds. CPS Energy determines the market value of such investments by reference to Bloomberg's financial terminal, published 82 quotations and other comparable information. No CPS Energy funds are invested currently in reverse repurchase agreements or derivative securities, securities whose rate of return is determined by reference to some other instrument, index, or commodity, except for certain natural gas options held under the Energy Price Risk Management Policy. See "WHOLESALE POWER MARKETING", "ENTERPRISE RISK MANAGEMENT" and "FUEL SUPPLY" herein.

STP Decommissioning Funds

CPS Energy invests in two specific decommissioning trusts, the STP Decommissioning Trust and the Master Trust (TCC Funded), in accordance with its decommissioning investment policy and as authorized by Texas law, the NRC and, where applicable, the PUCT. The STP Decommissioning Trust is the sinking fund created by CPS Energy for the sole purpose of financing the decommissioning expenses for its original (28%) interest in STP. CPS Energy obtained the Master Trust (TCC Funded) after it purchased from AEP Texas Central Company its additional 12% interest in STP. As part of the acquisition of the additional interest in STP, CPS Energy obtained a proportionate amount of the nuclear decommissioning trust fund originally created by TCC. Responsibility for continuous funding of the Master Trust (TCC Funded) will remain the responsibility of TCC customers through final decommissioning of STP. At acquisition by CPS Energy of the additional interest in STP from TCC, the funds were transferred to CPS Energy by TCC and placed into the Master Trust (TCC Funded), which is entirely separate from the existing decommissioning trust fund held in the STP Decommissioning Trust created and maintained by CPS Energy for its original interest in STP. See "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - South Texas Project" herein for further discussion of CPS Energy's acquisition of a 12% interest in STP from TCC. CPS Energy's investments in the STP Decommissioning Trust and in the Master Trust (TCC Funded) are held by an independent trustee and are invested pursuant to a separate investment policy adopted by the Board and to the provisions of the trust agreements of each trust.

Effective September 1, 2005, the Investment Act was amended to allow a Texas municipality which owns a municipal electric utility to invest its decommissioning trust funds in any investment authorized by Subtitle B, Title 9 of the Texas Property Code. The broad investment authority found in the Texas Property Code includes, but is not limited to, the power to invest in equities.

STP Decommissioning Trust

Under the Texas Property Code, other applicable law and the South Texas Project Decommissioning Trust Investment Policy ("STP Investment Policy") approved by the Board, the STP Decommissioning Trust may be invested as follows: (1) funds may be invested in investments permissible by law under the guidance and regulations issued by the NRC and under the Texas Property Code; (2) the STP Decommissioning Trust's investments should be diversified such that (a) no more than 5% of the securities held may be issued by one entity, with the exception of the federal government, its agencies and instrumentalities, and (b) the portfolio shall contain at least 20 different issues of securities with municipal securities and real estate investment trusts diversified as to geographic region; (3) derivative securities are limited to those whose purpose is to enhance returns of the STP Decommissioning Trust without a corresponding increase in risk of the portfolio; (4) securities lending transactions must be collateralized at 100-102%; (5) fixed income securities may not be rated below "BBB-" and "BBB-" by S&P and Fitch, respectively, or "Baa3" by Moody's, at the time of purchase, and the overall fixed income portfolio must be rated no less than "A" by S&P, Fitch and Moody's; (6) equity securities are permissible investments (a) limited to a cap of (i) 60% when the weighted average remaining life of the decommissioning liability exceeds 5 years, (ii) 30% when the weighted average remaining life of decommissioning liability ranges between 5 years and 2.5 years and during all years in which expenditures for decommissioning the nuclear units occur, and (iii) 0% when the weighted average remaining life of the decommissioning liability is less than 2.5 years, and (b) when the equities are of a type not considered to be speculative; and (7) commingled funds that include United States equity- indexed funds, actively managed United States equity funds, balanced funds, bond funds, real estate investment trusts, and international funds are permissible investments, if the commingled funds are consistent with the goals stated in the STP Investment Policy. Commingled funds (a) may be focused on specific market sectors or concentrated in a few holdings only as necessary to balance the trust's overall investment portfolio mix, and (b) may contain some below investment grade bonds; but the overall portfolio of debt instruments shall have a quality level, measured quarterly, not below an "A" rating by S&P, Fitch and Moody's, respectively.

The STP Decommissioning Trust is specifically prohibited (1) from investing in derivatives if being used to increase the value of the portfolio by any amount greater than the value of the underlying securities; (2) from the use of leverage (borrowing) to purchase securities or the purchase of securities on margin; (3) from investing in corporate or municipal debt securities that have a bond rating below investment grade (below "BBB-" by S&P and Fitch or "Baa3" by Moody's) at the time that the securities are purchased and the appropriateness of continuing to hold a particular debt security must be reexamined if the debt rating of the company in question falls below investment grade after the debt security has been 83 purchased; and (4) from investing in equity securities that are considered speculative (e.g., stocks of companies with limited operating history or that have low "safety" rankings from ratings agencies).

Investments in the STP Decommissioning Trust consisted of fixed income securities, equity securities and cash equivalents at June 30, 2010. The total market value of all investments was approximately $263 million (unaudited). Fixed income securities totaled approximately $138 million, equity securities had a market value of approximately $123 million and the remaining $2 million was invested in cash and cash equivalents. Based upon market values, 54% of fixed income securities were invested in United States Government and Government Agency obligations, 41% were invested in corporate bonds and municipal bonds and 5% were invested in foreign bonds.

Master Trust (TCC Funded)

Under applicable law, including NRC and PUCT regulations, and the STP Investment Policy, the Master Trust (TCC Funded), may be invested in (1) a way that, once the portfolio of securities (including commingled funds) held in the Trust contains securities with an aggregate value in excess of $20 million, the funds are diversified so that (a) no more than 5% of the Investment Manager's portfolio of securities held are issued by one entity, with the exception of the federal government, its agencies and instrumentalities, (b) the portfolio shall contain at least 20 different issues of securities with municipal securities and real estate investments diversified as to geographic region; (2) derivative securities limited to those whose purpose is to enhance returns of the trust without a corresponding increase in risk of the portfolio; (3) securities lending transactions when collateralized at 100-102%; (4) fixed income securities not rated below "BBB-" or "BBB-" by S&P and Fitch Ratings, respectively, or "Baa3" by Moody's, at the time of purchase; (5) equity securities, (a) limited to a cap of (i) 60% when the weighted average remaining life of the decommissioning liability exceeds 5 years, (ii) 30% when the weighted average remaining life ranges between 5 years and 2.5 years and during all years in which expenditures for decommissioning the nuclear units occur, and (iii) 0% when the weighted average remaining life of the decommissioning liability is less than 2.5 years, and (b) with at least 70% of the aggregate market value of the equity portfolio, including the individual securities in commingled funds, having a quality ranking from a major rating service and the overall portfolio of ranked equities with a weighted average quality rating equivalent to the composite rating of the S&P 500 index assuming equal weighting of each ranked security in the index; and (6) commingled funds that include United States equity-indexed funds, actively managed United States equity funds, balanced funds, bond funds, real estate investment trusts, and international funds that (a) are consistent with the goals stated in the investment policy, (b) are focused on specific market sectors or concentrated in a few holdings only if used as necessary to balance the trust's overall investment portfolio mix, and (c) may contain some below investment grade bonds; however, the overall portfolio of debt instruments shall have a quality level, measured quarterly, not below a "AA" rating by S&P or "Aa2" by Moody's.

The Master Trust (TCC Funded) is specifically prohibited (1) from investing in derivatives if being used to increase the value of the portfolio by any amount greater than the value of the underlying securities; (2) from the use of leverage (borrowing) to purchase securities or the purchase of securities on margin; (3) from investing in corporate or municipal debt securities that have a bond rating below investment grade (below "BBB-" or "BBB-" by S&P and Fitch Ratings, respectively, or "Baa3" by Moody's) at the time that the securities are purchased and the appropriateness of continuing to hold a particular debt security must be reexamined if the debt rating of the company in question falls below investment grade at some time after the debt security has been purchased; (4) from investing in equity securities where the issuer has a capitalization of less than $100 million; and (5) from investing in securities issued by the electric utility collecting the funds or any of its affiliates; however, investments may include commingled funds that contain securities issued by the electric utility if the securities of the utility constitute no more than 5% of the fair market value of the assets of such commingled funds at the time of the investment.

At June 30, 2010, CPS Energy's investments in the Master Trust (TCC Funded) consisted of fixed income securities, equity securities and cash equivalents with a total market value of approximately $88 million (unaudited). Fixed income securities totaled approximately $41 million, equity securities had a market value of approximately $46 million and the remaining $1 million was invested in cash and cash equivalents. Based upon market values, 81% of fixed income securities were invested in United States Government and Government Agency obligations and 19% were invested in corporate, municipal and foreign bonds.

Investment Policies

Under the Investment Act, CPS Energy is required to invest its funds in accordance with written investment policies that (1) primarily emphasize safety of principal and liquidity; (2) address investment diversification, yield, maturity, and the quality and capability of investment management; (3) include a list of authorized investments for CPS Energy funds and 84 the maximum allowable stated maturity of any individual investment; (4) state the maximum average dollar-weighted maturity allowed for pool fund groups; (5) contain the methods to monitor the market price of investments acquired with public funds; and (6) require the settlement of all transactions, except investment pool funds and mutual funds, on a delivery versus payment basis. All CPS Energy funds must be invested consistent with formally adopted written investment strategies that specifically address each fund's investment. Each strategy describes its objectives concerning (1) suitability of investment type; (2) preservation and safety of principal; (3) liquidity; (4) marketability of each investment; (5) diversification of the portfolio; and (6) yield.

Under the Investment Act, CPS Energy investments under all investment policies must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived".

Consistent with the requirements of the NRC, Texas Property Code, the Investment Act, and as applicable, the PUCT, the STP Decommissioning Trust, and the Master Trust (TCC Funded) will be invested consistent with the following goals: (1) the funds will be invested with a goal of earning a reasonable return commensurate with the need to preserve the value of the assets; (2) the portfolio of securities will be diversified to the extent reasonably feasible given the size of the trust; (3) asset allocation and the acceptable risk level of the portfolio will take into account market conditions, the time horizon remaining before the commencement and completion of decommissioning, and the funding status of the trust; (4) while maintaining an acceptable risk level, the investment emphasis when the remaining life of the liability exceeds five years will be to maximize net long-term earnings and the investment emphasis in the remaining investment period of the trust will be on current income and asset preservation; and (5) in selecting investments, the impact of the investment on the portfolio's volatility and expected return net of fees will be considered.

Additional Provisions

Under the Investment Act for the Operating Funds, STP Decommissioning Trust and the Master Trust (TCC Funded), CPS Energy must: (1) review annually and, if desired, change its adopted written investment policies and strategies; (2) designate investment officers to be responsible for investment of its funds consistent with the investment policies of CPS Energy; (3) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board; (4) require the qualified representative of firms seeking to sell securities to CPS Energy to (a) receive and review the CPS Energy investment policies; (b) acknowledge that reasonable controls and procedures have been implemented to preclude investment transactions not authorized by the CPS Energy investment policies; and (c) deliver a written statement attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the CPS Energy investment policies; (6) provide specific investment training for CPS Energy's investment officers; and (7) review, revise, and adopt on an annual basis a list of qualified brokers that are authorized to engage in investment transactions with CPS Energy.

For the STP Decommissioning Trust and the Master Trust (TCC Funded), CPS Energy is prohibited from being engaged as investment manager for the funds or from giving day-to-day management direction of the funds' investments. Therefore, the use of one or more professional investment managers is necessary to assure that the trusts are managed in a manner so that the funds are secure and earn a reasonable return. CPS Energy has the following duties concerning the use of one or more investment managers: (1) a duty to determine whether the investment manager's fee schedule for investment management services is reasonable, when compared to other such managers; (2) a duty to investigate and determine whether the past performance of the investment manager in managing investments has been reasonable; (3) a duty to investigate and determine whether the financial stability and strength of the investment manager is adequate for purposes of liability; (4) a duty to investigate and determine whether the investment manager has complied with the investment management agreement; and (5) a duty to investigate any other factors which may bear on whether the investment manager is suitable.

Some of the proceeds of the financial lease/leaseback transaction with a subsidiary of Unicom Corporation involving CPS Energy's JKS 1 are invested, as security for certain CPS Energy undertakings in connection with the transaction, in a collateralized payment undertaking agreement among (1) CPS Energy; (2) Spruce Equity Holdings, L.P., a Delaware limited partnership; (3) Spruce Holdings Trust, a Delaware business trust; and (4) a subsidiary of American International Group, Inc. Unicom Corporation, subsequent to this transaction, has merged into Exelon. See "LEASE TRANSACTION" and "POTENTIAL EXCISE TAX ADVERSELY AFFECTING THE CITY AND CPS ENERGY" herein.

85 CONTINUING DISCLOSURE OF INFORMATION

In the Ordinance, the City and the Board made the agreement described below for the benefit of the holders and Beneficial Owners of the Bonds. The City and the Board are required to observe the agreement for so long as they remain obligated to advance funds to pay the Bonds. Under the agreement, the City and the Board will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rulemaking Board ("MSRB") through its Electronic Municipal Market Access (EMMA) System, where such information will be available to the general public, free of charge, through an internet website at www.emma.msrb.com.

Annual Reports

Under Texas law, including, but not limited to, Chapter 103, as amended, Texas Local Government Code, Texas Government Code Sections 1502.66, 1502.67 and 1502.68, as amended, and the City's Home Rule Charter, the City and the Board must keep their fiscal records in accordance with generally accepted accounting principles, must have their financial accounts and records audited by an independent certified public accountant, and must file each audit report with the City Clerk or the Secretary of the Board, as appropriate, within 180 days after the close of the City's or Board's fiscal year. The City's fiscal records and audit reports are available for public inspection during the regular business hours of the City Clerk. The Board's financial statements and independent auditors' reports are available for public inspection to the extent information contained in them is not excepted from disclosure under the Texas Public Information Act, as amended, Texas Government Code, Chapter 552. Persons may obtain copies of the portions of these documents not excepted from disclosure under the Texas Public Information Act upon submission of a written request to the City Clerk or Secretary of the Board, as appropriate, and paying the reasonable copying, handling and delivery charges for providing this information.

The Ordinance obligates the Board to provide certain updated financial information and operating data to the MSRB annually. The information to be updated includes all quantitative financial information and operating data with respect to the Board of the general type included in this Remarketing Memorandum under the headings "SAN ANTONIO ELECTRIC AND GAS SYSTEMS – Customer Base"; "TEN-YEAR ELECTRIC CUSTOMER STATISTICS"; "FIVE- YEAR ELECTRIC AND GAS SALES BY CUSTOMER CATEGORY"; "FIVE-YEAR STATEMENT OF NET REVENUES AND DEBT SERVICE COVERAGE"; "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - Generating Capability"; "DESCRIPTION OF PHYSICAL PROPERTY – Electric System - Five-Year South Texas Project Capacity Factor"; "DESCRIPTION OF PHYSICAL PROPERTY – Other Electric and Gas Systems Statistics"; and APPENDIX B. The Board will update and provide this information within six months after the end of each fiscal year. The Board will provide the updated information to certain information vendors.

The Board may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by the United States Securities and Exchange Commission ("SEC") Rule 15c2-12 ("Rule"). The updated information will include audited financial statements, if the Board commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Board will provide audited financial statements when the audit report becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in APPENDIX B, or such other accounting principles as the Board may be required to employ from time to time pursuant to Texas law or regulation.

Material Event Notices

The Board will also provide timely notices of certain events to the MSRB. The Board will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) Bond defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes. Neither the Bonds nor the Ordinance make any provision for credit enhancement or debt service reserves. In addition, the Board will provide timely notice of any failure by the Board to provide information, data, or financial statements in accordance with its agreement described above under "Annual Reports". The Board will provide each notice described in this paragraph to the MSRB.

86 Availability of Information

Effective July 1, 2009 ("EMMA Effective Date"), the SEC implemented amendments to the Rule approving the establishment by the MSRB of EMMA, which is now the sole successor to the national municipal securities information repositories with respect to filings made in connection with undertakings made under the Rule after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the Board in accordance with its undertaking made for the Bonds will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB.

With respect to debt of the City issued prior to the EMMA Effective Date, the Board remains obligated to make annual required filings, as well as notices of material events, under its continuing disclosure obligations relating to those debt obligations (which includes a continuing obligation to make such filings with the Texas state information depository ("SID")). Prior to EMMA Effective Date, the Municipal Advisory Council of Texas ("MAC") had been designated by the State and approved by the SEC staff as a qualified SID. Subsequent to the EMMA Effective Date, the MAC entered into a Subscription Agreement with the MSRB pursuant to which the MSRB makes available to the MAC, in electronic format, all Texas-issuer continuing disclosure documents and related information posted to EMMA's website simultaneously with such posting. Until the Board receives notice of a change in this contractual agreement between the MAC and EMMA or of a failure of either party to perform as specified thereunder, the Board has determined, in reliance on guidance from the MAC, that making its continuing disclosure filings solely with the MSRB will satisfy its obligations to make filings with the SID pursuant to its continuing disclosure agreements entered into prior to the EMMA Effective Date.

Limitations and Amendments

The Board has agreed to update information and to provide notices of material events only as described above. The Board has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, conditions, or prospects or agreed to update any information that is provided, except as described above. The Board makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The Board disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders and Beneficial Owners of Bonds may seek a writ of mandamus to compel the Board to comply with its agreement.

The Board may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the Board, if the agreement, as amended, would have permitted an underwriter to purchase or sell the Bonds in the offering described herein in compliance with the Rule and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the Board (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the Beneficial Owners of the Bonds. The Board may also repeal or amend the provisions of its continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, and the Board also may amend these provisions in its discretion in any other manner or circumstance, but in either case, only if and to the extent that the provisions of this sentence would not have prevented an underwriter from lawfully purchasing or selling Bonds in the primary offering of bonds, giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. If the Board amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under "Annual Reports" an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided.

Compliance with Prior Undertakings

During the last five years, the City and the Board have complied in all material respects with all continuing disclosure agreements made by them in accordance with the Rule.

On October 20, 2010, the Board filed a material events notice with the MSRB through EMMA concerning its receipt from the Service (defined herein) of notice of the commencement of an audit by the Service of a series of its outstanding bonds to confirm compliance with applicable federal tax law. See "RECEIPT OF NOTICE OF INTERNAL REVENUE SERVICE AUDITS" herein. 87 RECEIPT OF NOTICE OF INTERNAL REVENUE SERVICE AUDITS

The Board received a letter dated January 25, 2008, from the Internal Revenue Service ("Service") that the Service would be conducting a routine audit of the $350,493,000 City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, New Series 2003 (Forward Delivery), dated July 1, 2003 ("Obligations"). The Obligations are currently outstanding in the principal amount of $118,950,000 and mature on February 1 in each of the years 2011 and February 1, 2013. The Board mailed its initial response to the Service on February 15, 2008. By mailing such information, the Board will have complied with all written requests from the Service concerning this matter. On May 20, 2008, CPS Energy, in response to discussions with the Service's agent concerning the Obligations, sent a letter seeking confirmation that in fact the Service was not conducting a routine audit with respect to the Obligations, but simply was seeking clarifications concerning CPS Energy's filing of its IRS Form 8038-G with respect to the City's Commercial Paper Program. On March 3, 2009, during a telephone conference with a representative of the City, the Service requested a copy of the transcript of the City's Commercial Paper Program. It appears that the Service is not auditing the Obligations. The Service's agent indicated that she was "looking to close out the audit" with respect to the City's Commercial Paper Program. Such notice of closure dated April 29, 2009, was subsequently received by CPS Energy.

On October 18, 2010, the Board received a letter, dated October 14, 2010, from the Service that the Service would be conducting an audit of the $375,000,000 City of San Antonio, Texas Electric and Gas Systems Revenue Bonds, Taxable New Series 2009C (Direct Subsidy – Build America Bonds). These obligations are currently outstanding in the principal amount of $375,000,000 and have a stated maturity of February 1, 2039. This letter from the Service states that it routinely examines municipal debt issuance to confirm compliance with applicable federal tax law and that it has no reason to believe that the referenced obligations are not compliant therewith. The Board is fully complying with the requests of the Service made in this letter. The Board has filed a material event notice with the MSRB through EMMA concerning its receipt of this letter. See "CONTINUING DISCLOSURE OF INFORMATION – Compliance with Prior Undertakings" herein.

LEGAL MATTERS

Legal matters incident to the authorization, issuance and sale of the Bonds were subject to the unqualified approval of the Attorney General of the State of Texas and the approval of certain legal matters by Co-Bond Counsel; legal matters incident to the remarketing of the Bonds are subject to the legal opinion of Bond Counsel. Neither Co-Bond Counsel nor Bond Counsel was engaged by the Board and only represented the Board and the City. Bond Counsel was requested to participate and did not take part in the preparation of this Remarketing Memorandum except as hereinafter noted, and such firms did not assume any responsibility with respect thereto or undertaken independently to verify any of the information contained herein, except that, in their capacity as Co-Bond Counsel, such firms reviewed the information under the captions "THE BONDS" (except under the sub-captions "Sources and Uses of the Bond Proceeds", "Perfection of Security for the Bonds", "Registered Owners’ Remedies", and "Book-Entry-Only System", as to which no opinions were expressed) and "CONTINUING DISCLOSURE OF INFORMATION" (except matters discussed under the subcaption "Compliance with Prior Undertakings", as to which no opinion was expressed), "LEGAL MATTERS", "LEGAL INVESTMENTS IN TEXAS", "SECURITIES LAWS", "APPENDIX D – CERTAIN PROVISIONS OF THE ORDINANCE", and "APPENDIX E – FORM OF INITIAL OPINION OF CO-BOND COUNSEL AND FORM OF REMARKETING OPINION OF BOND COUNSEL" in the original Remarketing Memorandum, and such firms were of the opinion that the information relating to the Bonds, the Ordinance and the legal issues contained under such captions and sub-captions represented an accurate and fair description of the laws and the legal issues addressed therein and, with respect to the Bonds, such information conformed to the Ordinance. The legal fees paid to Co-Bond Counsel in connection with the issuance of the Bonds were contingent on the sale and delivery of the Bonds.

The various legal opinions delivered concurrently with the delivery of the Bonds or the remarketing of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering legal opinions, the attorney did not and does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction, nor does the rendering of opinions guarantee the outcome of any legal dispute that may arise out of the transaction.

88 TAX MATTERS

The delivery of the Bonds was subject to the opinion of Co-Bond Counsel to the effect that interest on the Bonds for federal income tax purposes (1) is excludable from the gross income, as defined in section 61 of the Internal Revenue Code of 1986, as amended to the date hereof ("Code"), of the owners thereof pursuant to section 103 of the Code and existing regulations, published rulings, and court decisions, and (2) is not included in computing the alternative minimum taxable income of the owners thereof who are individuals or, except as hereinafter described, corporations. The statute, regulations, rulings, and court decisions on which such opinion was based are subject to change. In connection with the remarketing of the Bonds, Bond Counsel will deliver its opinion that the remarketing of the Bonds to a two-year Term Mode will not adversely affect any exclusion of interest on any Bond from gross income, as defined in section 61 of the Code, of the owner thereof for federal income tax purposes. Co-Bond Counsel has not been asked to investigate nor has it undertaken to investigate the current excludability of interest on the Bonds. The form of the original opinion of Co- Bond Counsel and form of remarketing opinion of Bond Counsel is attached hereto as Appendix E.

Interest on all tax-exempt obligation, including the Bonds, owned by a corporation will be included in such corporation’s adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a qualified mutual fund, a real estate investment trust (“REIT”), a financial asset securitization investment trust (“FASIT”), or a real estate mortgage investment conduit (“REMIC”). A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed.

In rendering its foregoing opinions, Co-Bond Counsel relied upon representations and certifications of the City and the Board made in a certificate of even date with the initial delivery of the Bonds pertaining to the use, expenditure, and investment of the proceeds of the Bonds and will assume continuing compliance with the provisions of the Ordinance by the City and the Board subsequent to the issuance of the Bonds. The Ordinance contains covenants by the City and the Board with respect to, among other matters, the use of the proceeds of the Bonds and the facilities and equipment financed or refinanced therewith by persons other than state or local governmental units, the manner in which the proceeds of the Bonds are to be invested, if required, the calculation and payment to the United States Treasury of any “arbitrage profits” and the reporting of certain information to the United States Treasury. Failure to comply with any of these covenants may cause interest on the Bonds to be includable in the gross income of the owners thereof from the date of the issuance of the Bonds.

Except as described above, Co-Bond Counsel expressed, and Bond Counsel will express, no other opinion with respect to any other federal, state or local tax consequences under present law, or proposed legislation, resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Co-Bond Counsel has not been asked to nor has it given an opinion as to the current excludability of interest on the Bonds. Co-Bond Counsel’s and Bond Counsel's opinions are not a guarantee of a result, but represents their respective legal judgment based upon its review of existing statutes, regulations, published rulings and court decisions and the representations and covenants of the City and the Board described above. No ruling has been sought from the Internal Revenue Service ("IRS") with respect to the matters addressed in the opinions of Co-Bond Counsel or Bond Counsel, and Co-Bond Counsel’s and Bond Counsel's opinions are not binding on the IRS. The IRS has an ongoing program of auditing the tax-exempt status of the interest on municipal obligations. If an audit of the Bonds is commenced, under current procedures the IRS is likely to treat the City as the "taxpayer", and the owners of the Bonds would have no right to participate in the audit process. In responding to or defending an audit of the tax-exempt status of the interest on the Bonds, the City may have different or conflicting interests from the owners of the Bonds. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds during the pendency of the audit, regardless of its ultimate outcome.

LEGAL INVESTMENTS IN TEXAS

Section 1201.041 of the Public Securities Procedures Act (Chapter 1201, as amended, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, as amended, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of at least "A" or its equivalent as to investment quality by a national rating agency. See "RATINGS" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at least one million dollars of capital, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. 89 The City has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bonds for such purposes. The City has made no review of laws in other states to determine whether the Bonds are legal investments for various institutions in those states.

SECURITIES LAWS

No registration statement relating to the Bonds has been filed with the SEC under the Securities Act of 1933, as amended, in reliance upon exemptions provided thereunder. The Bonds have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities laws of any other jurisdiction. The City assumes no responsibility for registration or qualification of the Bonds under the securities laws of any such jurisdiction in which the Bonds may be offered, sold or otherwise transferred. This disclaimer of responsibility for registration or qualification for sale or other disposition of the Bonds must not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions in such other jurisdictions.

RATINGS

Fitch Ratings ("Fitch"), Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Services, a Standard and Poors Financial Services LLC business ("S&P") have each reaffirmed the long-term and short-term ratings of "AA+"/"F1+", "Aa2"/"VMIG 1", and "AA-"/"A-1+", respectively, to the Bonds. An explanation of the significance of such ratings may be obtained from Fitch, Moody's and S&P. The rating of the Bonds by Fitch, Moody's and S&P reflects only the view of said company at the time the rating is given, and the City makes no representations as to the appropriateness of the rating. There is no assurance that the rating will continue for any given period of time, or that the rating will not be revised downward or withdrawn entirely by Fitch, Moody's and S&P in the judgment of Fitch, Moody's and S&P as circumstances so warrant. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the Bonds.

CO-FINANCIAL ADVISORS

Public Financial Management, Inc. and Estrada Hinojosa & Company, Inc. ("Co-Financial Advisors") were employed as Co-Financial Advisors to the Board in connection with the remarketing of the Bonds. The Co-Financial Advisors' fee for services rendered with respect to the initial issuance of the Bonds was contingent upon the remarketing of the Bonds. Although the Co-Financial Advisors have read and participated in the preparation of this Remarketing Memorandum, they have not independently verified any of the information set forth herein. The information contained in this Remarketing Memorandum has been obtained primarily from the City's and the Board's records and other sources which are believed to be reliable, including financial records of the Board and other entities, which may be subject to interpretation. No person, therefore, is entitled to rely upon the participation of the Co-Financial Advisors as implicit or explicit expression of opinions as to the completeness and accuracy of the information contained in this Remarketing Memorandum. The Co-Financial Advisors have relied on the opinion of Bond Counsel and have not verified and do not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies.

INDEPENDENT AUDITORS

This Remarketing Memorandum includes the audited financial statements of CPS Energy for the fiscal years ended January 31, 2010 and 2009. These financial statements included in this Remarketing Memorandum as APPENDIX B have been audited by Virchow, Krause & Co., LLP, Garza, Preis & Co., L.L.C., and Robert J. Williams, CPA, independent accountants, as stated in their report thereon, which includes a reference to other auditors, which also appears in APPENDIX B hereto.

As part of its external audit procurement process, CPS Energy issued a Request for Proposal for annual financial audits and related services in July 2008. On August 25, 2008, CPS Energy selected Virchow, Krause & Co., LLP, Garza, Preis & Co., LLC and Robert J. Williams, CPA, to serve as its external auditors. The contract extends through the fiscal year

90 ended January 31, 2012, with a one-year extension option. Effective June 1, 2009, Virchow Krause & Company, LLP changed their name to Baker Tilly Virchow Krause, LLP.

USE OF INFORMATION IN REMARKETING MEMORANDUM

No person has been authorized to give any information or to make any representations other than those contained in this Remarketing Memorandum, and if given or made, such other information or representations must not be relied upon as having been authorized by the City or the Board. This Remarketing Memorandum does not constitute an offer to sell or solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer of solicitation.

MISCELLANEOUS

The description of the Bonds contained in this Remarketing Memorandum does not purport to be complete. All references to the Bonds are qualified by reference to the Ordinance and to the complete form of the Bonds. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents and resolutions contained in this Remarketing Memorandum are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. So far as any statements made in this document involve budgeted amounts or other estimates or projections, whether or not so expressly stated, they should not be considered statements of fact or representations that the budgeted amount, estimate or projection will approximate actual results.

This Remarketing Memorandum has been approved by the City Council and the Board.

CITY OF SAN ANTONIO, TEXAS CITY PUBLIC SERVICE BOARD OF SAN ANTONIO

By /s/ Julián Castro By /s/ Charles E. Foster Mayor, City of San Antonio, Texas Chairman, Board of Trustees City Public Service Board of San Antonio

91 [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX A

______CITY OF SAN ANTONIO, TEXAS

GENERAL DEMOGRAPHIC AND ECONOMIC INFORMATION [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX A

CITY OF SAN ANTONIO, TEXAS GENERAL DEMOGRAPHIC AND ECONOMIC INFORMATION

This Appendix contains a brief discussion of certain economic and demographic characteristics of the City of San Antonio, Texas (the “City” or “San Antonio”) and of the metropolitan area in which the City is located. Although the information in this Appendix has been provided by sources believed to be reliable, no investigation has been made by the City to verify the accuracy or completeness of such information.

Population and Location

The Census 2000, prepared by the United States Census Bureau (“U.S. Census Bureau”), found a City population of 1,144,646. The City’s Department of Planning and Community Development estimated the City’s population to be 1,383,072 at December 31, 2009. The U.S. Census Bureau ranks the City as the second largest in the State of Texas and the seventh largest in the United States.

The City is the county seat of Bexar County, which had a population of 1,392,931 according to the Census 2000. The City’s Department of Planning and Development Services estimated Bexar County’s population to be 1,676,847 at December 31, 2009. The City is located in south central Texas approximately 80 miles south of the state capital in Austin, 165 miles northwest of the Gulf of Mexico, and approximately 150 miles from the United States (“U.S.”) / Mexico border cities of Del Rio, Eagle Pass, and Laredo.

The following table provides the population of the City, Bexar County, and the San Antonio Metropolitan Statistical Area (“MSA”)1 as of April 1 for the years shown:

City of Bexar San Antonio Year San Antonio County MSA 1920 161,379 202,096 238,639 1930 231,543 292,533 333,442 1940 253,854 338,176 376,093 1950 408,442 500,460 542,209 1960 587,718 687,151 736,066 1970 654,153 830,460 888,179 1980 786,023 988,971 1,088,881 1990 935,933 1,185,394 1,324,749 2000 1,144,646 1,392,931 1,711,7031 ______1 As of June 2003, the U.S. Office of Management and Budget redefined the MSA by increasing the number of counties from four to eight: Atascosa, Bandera, Kendall, and Medina Counties were added to its mainstays of Bexar, Comal, Guadalupe, and Wilson Counties. (The 2000 figure reflects the new 2003 redefined eight-county area.) Sources: U.S. Census Bureau; City of San Antonio, Department of Planning and Development Services.

Area and Topography

The area of the City has increased through numerous annexations and now contains approximately 467 square miles. The topography of San Antonio is generally hilly with heavy black to thin limestone soils. There are numerous streams fed with underground spring water. The average elevation is 788 feet above mean sea level.

Three-Year Annexation Plan Process

Through both full and limited purpose annexations, the City has grown from its original size of 36 square miles to its current area, encompassing 467 square miles, and having a tax year 2009 net taxable value of $73.2 billion.

A-1 By City Charter, City Council has the power to annex territory by passage of an ordinance. As of January 1999, State law mandates that municipalities prepare an annexation plan specifically identifying annexations that may occur beginning on the third anniversary of the date such plan was adopted. The City is required to maintain the annexation plan on the City’s web site and notify property owners and public entities.

The City is currently engaged in a sector plan process to help define how the City may grow. This process will help identify areas adjacent to the current City limits and within its extra-territorial jurisdiction (“ETJ”), generally five miles outside the boundary, that are appropriate for annexation. At the present time, the City does not have a three-year annexation plan in place, but plans to start drafting a plan in FY 2010.

Governmental Structure

The City is a “Home Rule Municipality” that operates pursuant to the Charter of the City of San Antonio (the “City Charter”), which was adopted on October 2, 1951 and became effective on January 1, 1952. The City Charter provides for a council-manager form of government, whereby subject only to the limitations imposed by the Texas Constitution and the City Charter, all powers of the City are vested in an elective Council (the “City Council”) which enacts legislation, adopts budgets, and determines policies. The City Council is comprised of 11 members, with ten members elected from single-member districts, and the Mayor elected at-large. Each member of the City Council serves two-year terms, and each member is limited to a maximum of four full terms. The office of Mayor is considered a separate office. The terms of all members of the City Council currently sitting in office expire on May 31, 2011. The City Council also appoints a City Manager who executes the laws and administers the government of the City, and serves as the City’s chief administrative officer. The City Manager serves at the pleasure of City Council.

City Charter

The City may only hold an election to amend its City Charter every two years. Since its adoption, the City Charter has been amended on seven separate occasions: November 1974, January 1977, May 1991, May 1997, November 2001, May 2004, and November 2008.

The amendments to the City Charter that were adopted in 2001 included, among others, provisions creating the position of an independent City Internal Auditor and granting the City Manager the power to appoint and remove the City Attorney upon the City Council’s confirmation.

At the May 2004 City Charter election, voters considered four propositions seeking to amend the City Charter as follows: Proposition 1 was to amend the provisions of the City Charter applicable to the term of office and term limits of members of the City Council; Proposition 2 was to amend the provisions of the City Charter applicable to compensation for members of the City Council and the Mayor; Proposition 3 was to amend the City Charter by establishing an independent Ethics Review Board; and Proposition 4 was to amend the City Charter to permit an individual member of the City Council to hire staff who serve at the will of the Councilmember. Of these four propositions, only Proposition 3 establishing an independent Ethics Review Board was approved by the voters.

At the November 4, 2008 election, an amendment to the City Charter passed, which revised term limits to allow a mayor or member of the City Council to serve four full two-year terms of office, instead of two full two-year terms, but prohibited the current and former mayors and members of the City Council, whether appointed or elected, as of the date of the election, from being elected to more than two full two-year terms.

Services

The full range of services provided to its constituents by the City includes ongoing programs to provide health, welfare, art, cultural, and recreational services; maintenance and construction of streets, highways, drainage, and sanitation systems; public safety through police and fire protection; and urban redevelopment and housing. The City also considers the promotion of convention and tourism and participation in economic development programs high priorities. The funding sources from which these services and capital programs are provided include ad valorem, sales and use, and hotel occupancy tax receipts, grants, user fees, bond proceeds, tax increment financing, and other sources.

A-2 In addition to the above described general government services, the City provides services financed by user fees set at levels adequate to provide coverage for operating expenses and the payment of outstanding debt. These services include airport and solid waste management.

Electric and gas services to the San Antonio area are provided by CPS Energy (“CPS”), an electric and gas utility owned by the City that maintains and operates certain utilities infrastructure. This infrastructure includes a 15 generating unit electric system and the gas system that serves the San Antonio area. CPS operations and debt service requirements for capital improvements are paid from revenues received from charges to its customers. CPS is obligated to transfer a portion of its revenues to the City. CPS revenue transfers to the City for the City’s fiscal year ending September 30, 2009 were $265,459,226. (See “SAN ANTONIO ELECTRIC AND GAS SYSTEMS” herein.)

Water services are provided by the San Antonio Water System (“SAWS”), San Antonio’s municipally- owned water supply, water delivery, and wastewater treatment utility. SAWS is in its 18th year of operation as a separate, consolidated entity. SAWS operating and debt service requirements for capital improvements are paid from revenues received from charges to its customers. SAWS is obligated to transfer a portion of its revenues to the City. SAWS revenue transfers to the City for the City’s fiscal year ending September 30, 2009 were $10,146,195. (See “SAN ANTONIO WATER SYSTEM” herein.)

Economic Factors

The City supports a favorable business environment and economic diversification which is represented by various industries, including domestic and international trade, convention and tourism, medicine and health care, government employment, manufacturing, information security, financial services, telecommunications, telemarketing, insurance, and oil and gas refining. Support for these economic activities is demonstrated by the City’s commitment to its ongoing infrastructure improvements and development, and its dedicated work force. With continuously resilient employment growth, San Antonio fares well when compared to the State and nation. San Antonio’s unemployment rate remained constant at 7.7% for July, when compared to the prior month. The Texas unadjusted (actual) unemployment rate remained constant at 8.5% for July, when compared to the prior month. The nation’s unemployment rate increased to 9.7% in July, up from 9.6% reported in June. Total employment in the San Antonio MSA for July 2010 was 908,900. Education and health services, trade, transportation and utilities, and professional and business services represent the largest employment “super” sectors in the San Antonio MSA. Healthcare, retail trade, leisure and hospitality, and education represent the largest industries in San Antonio.

Finance Industry

According to a study conducted by the “Finance San Antonio Ad Hoc Committee,” the finance industry is San Antonio’s largest economic generator with an annual economic impact of $20.5 billion in 2004. The industry employs 50,469 people to whom it pays an average annual wage of $52,612. Total wages paid in the industry amounted to $2.66 billion in 2004. As a percent of total employment, the finance industry in San Antonio is the largest of any major metropolitan area in Texas. Compared to the growth in wages and employment in San Antonio overall, the finance industry experienced higher levels of average annual growth in these areas since 2001. Average annual growth in total wages paid by the finance industry for years 2001 through 2004 was 4.5%, compared to 4% for all industries. Average annual growth in employment in the finance industry over this same time period was 2.18%, compared to 0.36% for all other industries.

The largest sector in this industry is insurance. While this sector is led by USAA, San Antonio is home to other insurance headquarters such as Catholic Life and GPM Life, as well as being the home to many regional operations centers for many health care insurers. Insurers with substantial regional operations centers in San Antonio include Caremark, United Health, and PacifiCare.

On October 29, 2009, Nationwide selected San Antonio for its $92 million consolidation and expansion involving two project phases of their new corporate campus. San Antonio competed with several other communities across the U.S. for a potential consolidation and expansion of Nationwide operations. The City, in partnership with the State and Bexar County, offered a competitive package of business incentives to retain the existing 932 jobs and

A-3 compete for 838 new jobs. Nationwide selected San Antonio over Raleigh, North Carolina, Little Rock, Arkansas, and Tulsa, Oklahoma for its consolidation and expansion. On February 9, 2010, Allstate Insurance Corporation (“Allstate”) announced its decision to locate a customer operations center, invest $12 million, and create 600 new full-time jobs in San Antonio. The core function of the customer operations center will support direct sales through calls to 1-800-ALLSTATE and sell additional insurance products to existing clients. Allstate is the nation’s largest publicly held personal lines insurer. Allstate employs an estimated 70,000 agents and support staff nationwide. The company was founded in 1931 as part of Sears Roebuck and Co. In 2009, the company ranked number 81 on the list of Fortune 500 Companies with annual revenues exceeding $29 billion. Allstate’s main lines of insurance include automobiles, property, life, and retirement and investment products. Allstate has two other sales support centers located in Northbrook, Illinois (its headquarters) and Charlotte, North Carolina. In May 2010, Allstate reported it has hired 200 workers and plans to hire an additional 128 for its new customer information center, opening June 2010 in San Antonio. It eventually expects the center will employ 600 employees, who will sell Allstate products and provide service to the company’s customers.

The second largest sector in this industry is banking. Like insurance, San Antonio is also the home of many banking headquarters and regional operation centers such as Frost National Bank, Broadway Bank, and USAA Bank. Companies with large regional operations centers in San Antonio include Wells Fargo, J.P. Morgan, and Citi.

Healthcare and Bioscience Industry

The healthcare and bioscience industry remains one of the largest industries in the San Antonio economy. The industry is diversified, with related industries such as research, pharmaceuticals, and manufacturing contributing approximately the same economic impact as health services. According to the San Antonio’s Health Care and Bioscience Industry: Economic Impact Study commissioned by the Greater San Antonio Chamber of Commerce, the total economic impact from this industry sector totaled approximately $16.3 billion in 2007. The industry provided 116,417 jobs, or approximately 14.2% of the City’s total employment. The healthcare and bioscience industry’s annual payroll in 2007 approached $4.8 billion. The 2007 average annual wage of San Antonio workers was $38,251, compared to $40,784 for healthcare and bioscience employees. These 2007 economic impact figures represent growth of 6.5% over the previous year, or approximately $1 billion. The Greater San Antonio Chamber of Commerce updates economic impact figures at the request of industry leaders and expects an update completed in the coming year.

Health Care. The 900-acre South Texas Medical Center (the “Medical Center”) has ten major hospitals and nearly 80 clinics, professional buildings, and health agencies with combined budgets of over $3.34 billion as of January 2009. Approximately 27,884 Medical Center employees provided care for over 4.88 million outpatients and over 103,605 inpatients. Physical plant values, not adjusted for inflation, representing the original investments in physical facilities and equipment (less depreciation) represent approximately $2.274 billion. The Medical Center has about 300 acres of undeveloped land still available for expansion. Capital projects planned for the years 2009 through 2013 total approximately $1.238 billion.

Central to the Medical Center is The University of Texas Health Science Center at San Antonio (the “UTHSC”) with its five professional schools awarding more than 63 degrees and certificates, including Doctor of Medicine, Doctor of Dental Surgery, and Doctor of Philosophy in nursing, allied sciences, and other fields. The UTHSC has over two million square feet of education, research, treatment, and administrative facilities with a faculty and staff of approximately 5,000. The UTHSC oversees the federally-funded Regional Academic Health Center in the Rio Grande Valley with facilities in Harlingen, McAllen, Brownsville, and Edinburg. Another UTHSC South Texas campus is located in Laredo.

There are numerous other medical facilities outside the boundaries of the Medical Center, including 25 short-term general hospitals, two children’s psychiatric hospitals, and two state hospitals. There are three U.S. Department of Defense (“DoD”) hospitals, one of which is located in the Medical Center (as hereinafter described).

Biomedical Research and Development. Research and development are important areas that strengthen San Antonio’s position as an innovator in the biomedical field, with total research economic impact exceeding $1.005 billion annually.

A-4 The Texas Research Park (the “Park”) is the site for the University of Texas Institute of Biotechnology/Department of Molecular Medicine, the Cancer Therapy and Research Center (“CTRC”), CTRC’s Institute for Drug Development, The Southwest Oncology Group, and dozens of new biotechnology-related companies, whose work involves various stages of the very complicated drug development process. The Park has over $140 million invested in its facilities. The Park is owned and operated by the Texas Research and Technology Foundation, whose mission includes building a world-class center for life-science research and medical education and promoting economic development through job creation.

The Southwest Foundation for Biomedical Research (the “Foundation”), which conducts fundamental and applied research in the medical sciences, is one of the largest independent, non-profit, biomedical research institutions in the U.S. and is internationally renowned. The Foundation has a full-time staff of 85 doctoral level employees, a technical staff of 125, and an administrative and supporting staff of approximately 200 persons. Research departments include Departments of Genetics, Physiology and Medicine, Virology and Immunology, and Organic and Biological Chemistry. The Department of Laboratory Animal Medicine maintains the animal care facilities. The Foundation is also home to one of the few biosafety level (“BSL”) 4 labs in the country, and its Genomics Computing is the world’s largest computer cluster devoted to statistical genetic analysis.

The UTHSC has been a major bioscience research engine since its inception, with strong research groups in cancer, cancer prevention, diabetes, drug development, geriatrics, growth factor and molecular genetics, heart disease, stroke prevention, and many other fields. One of its latest achievements is the establishment of the Children’s Cancer Research Center, endowed with $200 million from the State of Texas’s tobacco settlement. The UTHSC, along with the CTRC, form the San Antonio Cancer Institute, a National Cancer Institute-designated Comprehensive Cancer Center.

The University of Texas at San Antonio (“UTSA”) houses the Cajal Neuroscience Research Center, which is funded by $6.3 million in ongoing grants and is tasked with training students in research skills while they perform basic neuroscience research on subjects such as aging and Alzheimer’s disease. UTSA is also a partner in Morris K. Udall Centers of Excellence for Parkinson’s Disease research which provides research for the causes and treatments of Parkinson’s disease and other neurodegenerative disorders.

A number of highly successful private corporations, such as Mission Pharmacal, DPT Laboratories, Ltd., and Genzyme Oncology, Inc., operate their own research and development groups and act as guideposts for numerous biotech startups, bringing new dollars into the area’s economy. A notable example of the results of these firms’ research and development is Genzyme Oncology, Inc., which has developed eight of the last 11 cancer drugs approved for general use by the U.S. Food and Drug Administration.

In 2009, Medtronic, Inc. opened its Diabetes Therapy Management and Education Center in San Antonio. Medtronic, located at the Overlook at the Rim, is investing $23 million and plans to hire 1,300 employees within its first five years. The new operation is expected to generate more than $750 million in economic benefit for San Antonio and Texas each year.

Military Health Care. San Antonio currently has two major military hospitals, each of which has positively impacted the City for decades. Brooke Army Medical Center (“BAMC”) conducts treatment and research in a 1.5 million square foot facility at Fort Sam Houston Army Base, providing health care to nearly 640,000 military personnel and their families annually. BAMC is a Level I trauma center (the only one in the Army medical care system) and contains the world-renowned Institute of Surgical Research Burn Center. BAMC also conducts bone marrow transplants in addition to more than 600 ongoing research studies.

Wilford Hall Medical Center (“Wilford Hall”) is the largest medical facility of the U.S. Air Force. In addition to providing health care to military personnel and their families, Wilford Hall is also a Level I trauma center (the only one in the U.S. Air Force medical care system) that handles emergency medical care for approximately one-fourth of the City’s emergency patients. Wilford Hall provides medical education for the majority of its physician and dental specialists and other health professionals, conducts clinical investigations, and offers bone marrow and organ transplantation.

A-5 The San Antonio Military Medical Center (“SAMMC”) will be established as a result of the 2005 Base Realignment and Closure (“BRAC 2005”) and will combine the Level 1 Trauma elements of Wilford Hall and BAMC. Wilford Hall will be renamed SAMMC-South and BAMC was renamed SAMMC-North. SAMMC-North will double its Level I trauma facility and will incorporate the Level I trauma missions from SAMMC-South. SAMMC-South will become an outpatient facility and will receive outpatient missions from SAMMC-North. Wilford Hall Medical Center (SAMMC-South) will ultimately be replaced by a state of the art outpatient facility. Scheduled for completion in 2013, this $450M center will provide world-class medical care for the community.

BRAC 2005 actions will have a major positive impact on military medicine in San Antonio resulting in $3.1 billion in construction and the net gain of over 12,500 personnel in San Antonio by 2011. Currently, all U.S. Army combat medic training is conducted at Fort Sam Houston Army Base. As a result of BRAC 2005, all military combat medic training will be undertaken at the new Medical Education and Training Campus at Fort Sam Houston Army Base.

San Antonio will receive new medical research missions. BRAC 2005 will transform the U.S. Army Institute for Surgical Research into a tri-service Joint Center of Excellence for Battlefield Health and Trauma Research. This new research facility will be adjacent to SAMMC-North. The new mission will continue its cutting edge research in the areas of robotics, prosthetics, and regenerative medicine.

Audie L. Murphy Memorial Veterans Hospital, located in the Medical Center, is an acute care facility and supports a nursing home, the Spinal Cord Injury Center, an ambulatory care program, the Audie L. Murphy Research Services (which is dedicated to medical investigations), and the Frank Tejeda Veterans Administration Outpatient Clinic (which serves veterans located throughout South Texas). The two military medical care facilities and the Veterans Hospital partner in a variety of ways, including clinical research and the provision of medical care to military veterans. This partnership is unique and represents a valuable resource to San Antonio and the nation.

Hospitality Industry

The City’s diversified economy includes a significant sector relating to the hospitality industry. A study prepared by Richard V. Butler, Ph.D. and Mary E. Stefl, Ph.D., both professors at Trinity University, found that in 2008 the hospitality industry had an economic impact of nearly $11.0 billion. The estimated annual payroll for the industry in 2008 was $1.99 billion, and the industry employed an estimated 106,311 people.

In 2009, the City’s overall level of hotel occupancy decreased by 11.5%. However, this is considering room supply increased by 6.0%. Total room nights sold in the destination decreased by 6.2%. The average daily room rate decreased 10.6%, revenue per available room decreased 20.9%, and overall revenue decreased 16.2%.

Tourism. The list of attractions in the San Antonio area includes, among many others, the Alamo (and other sites of historic significance), the River Walk, and two major theme parks (SeaWorld San Antonio and Six Flags Fiesta Texas). D.K. Shifflet & Associates, Ltd. reported San Antonio attracted 25 million visitors in 2008. Of these, 11 million were overnight leisure visitors, placing San Antonio as one of the top U.S. destinations in Texas. Recent initiatives contributing to this success are the City’s new brand image, the JW Marriot San Antonio Hill Country Resort and Spa (opened in January 2010), the River Walk Expansion Project (Museum Reach expansion completed in May 2009; Mission Ranch to be completed in 2013), and new events like the Rock ‘n’ Roll Marathon, held in November 2009.

Conventions. San Antonio is one of the top convention cities in the country, and the opening of the 1,003- room Grand Hyatt Hotel along with the 1,002-room JW Marriot allows the City to host more and larger conventions and meetings in the years to come. The City continues to be proactive in attracting convention business through its management practices and marketing efforts.

A-6 The following table shows both overall City performance as well as convention activity booked by the San Antonio Convention and Visitors Bureau for the calendar years indicated:

Revenue per Convention Available Delegate Calendar Hotel Room Room Convention Convention Expenditures Year Occupancy 1 (RevPAR) 1 Nights Sold 1 Attendance 2 Room Nights 2 (Millions) 2, 3 2000 64.7% $55.34 6,549,812 389,448 696,215 $350.8 2001 62.7 54.10 6,486,944 419,970 712,189 378.3 2002 64.0 56.26 6,741,011 483,452 693,921 435.5 2003 63.8 53.98 6,903,131 429,539 613,747 387.0 2004 64.4 55.80 7,022,152 491,287 621,640 510.5 2005 68.9 63.02 7,569,655 503,601 699,932 523.3 2006 69.1 69.14 7,699,411 467,426 736,659 485.8 2007 66.3 69.67 7,635,949 455,256 647,386 473.1 2008 64.9 70.93 7,756,481 563,164 691,525 607.5 2009 57.4 56.08 7,249,737 399,408 660,736 474.5 ______1 Data obtained from Smith Travel Research based on hotels in the San Antonio selected zip code reports dated March 2007, February 2009, and January 2010. 2 Reflects only those conventions hosted by the San Antonio Convention and Visitors Bureau. 3 Beginning in 1998, the estimated dollar value is calculated in accordance with the 1998 DMAI Foundation Convention Income Survey Report conducted by Deloitte & Touche LLP, which reflected the average expenditure of $900.89 per convention and trade show delegate. January 2004 – September 2008 are based on an average expenditure of $1,039.20 per convention and trade show delegate, and October 2008 – December 2009 are based on an average expenditure of $1,188.05 per convention and trade show delegate. Source: San Antonio Convention and Visitors Bureau.

Military Industry

The military represents a significant component of the City’s economy providing an annual economic impact of over $13 billion for the City. Three major military installations are currently located in Bexar County, including Lackland Air Force Base (“Lackland AFB”), Fort Sam Houston Army Post (“Fort Sam Houston”), and Randolph Air Force Base (“Randolph AFB”). In addition, the property of Brooks Air Force Base (“Brooks AFB”), a fourth major military installation, was transferred from the U.S. Air Force to the City-created Brooks Development Authority (“BDA”) in 2002, as part of the Brooks City-Base Project (“Brooks City-Base”). Furthermore, the military is still leasing over two million square feet of space at Port San Antonio, which is the former Kelly Air Force Base that was closed in 2001.

One of the most significant events in San Antonio’s recent economic history is the BRAC 2005. BRAC 2005’s realignment of medical facilities resulted in a major positive impact on military medicine in San Antonio, with $3.1 billion in construction and the addition of 12,500 jobs at Fort Sam Houston by September 2011. This is up from the $1.6 billion in construction and 11,500 personnel projected in 2007. Currently, all U.S. Army combat medic training is conducted at Fort Sam Houston.

The BRAC 2005 will establish an internationally renowned teaching and research hospital by creating the largest school for training medical technicians in the world. Each year, San Antonio will graduate over 152,000 students across all three bases. BRAC 2005 will also bring management and command centers for the Fifth Army, Sixth Army, Military Property Management, and Military Health Care. As a result, it will provide jobs in six targeted industries: health care, health care education, communications, technology, intelligence, and security. BRAC 2005 will strengthen San Antonio’s role as a leading military research, training, and education center. It will establish a Joint Base San Antonio, which will consolidate installation management at the three military bases in San Antonio, thereby creating the largest installation in the DoD, while supporting 78,000 personnel and $10.3 billion in property.

A-7 Port San Antonio. On July 13, 2001, Kelly Air Force Base (“Kelly AFB”) officially closed and the land and facilities were transferred to the Greater Kelly Development Authority (“GKDA”), a City-created Local Redevelopment Authority responsible for overseeing the redevelopment of the base into a business and industrial park. The business park is now known as Port San Antonio (the “Port”). The Port has developed a rail port for direct international rail operations, including inland port distribution with the Port of Corpus Christi, and continues to work on establishing international air cargo operations and the expansion and addition of new tenants.

With a stable tenant base of over 70 companies and seven remaining Air Force agencies, the Port has over 8,500 workers generating a payroll of over $520 million a year. Two new announcements at the Port include the Boeing Company’s decision to bring a portion of their 787 Dreamliner workload to the Port for follow-on refurbishment and testing following manufacturing. This new investment will potentially create another 400 aerospace jobs in FY 2010.

BRAC 2005 will bring an additional 2,900 military and DoD civilian personnel to the Port. Additionally, the Air Force is investing $60 million in the remodeling of the 450,000 square foot building it is preparing to occupy. By September 2011, there will be over 6,000 DoD personnel at the Port. Another announcement in 2009 was the expansion of Affiliated Computer Services, a Fortune 500 Company, which is adding an additional 300 employees.

Other major commercial employers at the Port include Boeing, Lockheed Martin, General Dynamics, Standard Aero, Pratt & Whitney, Chromalloy, Gore Design Completions, and EG&G. By the end of 2010, the tenant employee base will have grown to over 12,000 as a result of these expansions.

In February 2009, the Port opened an on-site U.S. Customs and Homeland Security facility to enable international air cargo to develop at Kelly Field Industrial Airport. Mexpress International, Inc. now provides air cargo service between Mexico and San Antonio on a three times per week basis.

In September 2009, Boeing Global Services and Support, San Antonio, Texas was awarded a $150 million contract for programmed depot maintenance, unprogrammed depot level maintenance, and modifications installations on C/KC-135 series aircraft, resulting in the retention of approximately 300-400 aerospace jobs at the Port.

With over 11 million square feet of industrial/commercial space, the Port is the largest commercial property leasing firm in San Antonio. In April 2007, the East Kelly Railport opened with a 360,000 square foot speculative building offered by a private developer that today is 100% occupied. Already proving to be a busy passageway, the East Kelly Railport saw a 30% increase in rail activity from 2007 to 2008, with revenues exceeding $149,600 during the same period. The developer, Santa Barbara Development, has recently completed construction on a second 265,000 square foot speculative building.

Brooks City-Base. Brooks City-Base continues to draw private business investment. However, the military missions will be relocated over the next three to five years as a result of the BRAC 2005 recommendations. Of the approximately 21 missions currently located at Brooks City-Base, four will be relocated to Fort Sam Houston, seven to Lackland AFB, and two to Randolph AFB. This will account for approximately 950 personnel. While many of the military missions are being relocated from Brooks City-Base, private development is increasing. In addition, Brooks City-Base is continuing its goal of sustainability by creating a Tax Increment Reinvestment Zone (“TIRZ”). The TIRZ has been established and the City is planning to utilize the tax increments generated to assist in funding street infrastructure projects.

There are several projects currently underway or recently completed at Brooks City-Base. Some of these project highlights are included below.

Dermatological Products of Texas Laboratories’ new site at Brooks City-Base is a combination research and development warehouse and production facility of nearly 250,000 square feet. The project involves two new buildings with a capital investment of $26 million.

A-8 In July 2008, Vanguard Health Systems, Inc. and its affiliate Baptist Health System purchased 28 acres at Brooks City-Base and have an option for an additional 20 acres under contract. Crews began site work on January 18, 2010 for the new Mission Trail Baptist Hospital at Brooks City-Base. This new hospital will replace the current Southeast Baptist Hospital. The new hospital will be completed in June 2011 and will have 81 beds but could be expanded up to 300 beds. Initially, the new hospital will employ 300 staff but will expand to 800 staff. This represents a significant economic investment in the community. Ultimately, the hospital will be part of a medical campus with one medical office building being constructed concurrently with the hospital and six additional buildings constructed under a phased timeline.

A $24.5 million Emergency Operations Center (the “EOC”) began operations at Brooks City-Base in December 2007. The EOC was financed through City and Bexar County bond funds and will be a campus of City, County, Regional, State, and Federal departments and/or personnel.

The San Antonio Metropolitan Health District (“SAMHD”) has completed renovation of a Brooks City- Base facility to establish a BSL 3 Laboratory. SAMHD has instituted additional public health capabilities at Brooks City-Base and is investigating plans for additional expansions to the BSL 3 Laboratory.

The Brooks Academy of Science and Engineering moved into Brooks City-Base in March 2007. The school’s curriculum focuses on science and engineering by providing students with a unique opportunity to learn and participate in the cutting-edge Air Force programs found at Brooks City-Base and throughout San Antonio.

Brooks City-Base has leased 25 acres to the City for expansions of the existing sports fields and construction has recently begun on this project.

Fort Sam Houston and Lackland AFB. Fort Sam Houston is engaged in military-community partnership initiatives to help reduce infrastructure costs and pursue asset management opportunities using military facilities. In April 2000, the U.S. Army (the “Army”) entered into a partnership with the private organization, Fort Sam Houston Redevelopment Partners, Ltd. (“FSHRP”), for the redevelopment of the former Brooke Army Medical Center and two other buildings at Fort Sam Houston. These three buildings, totaling about 500,000 square feet in space and located in a designated historic district, had been vacant for several years and were in a deteriorating condition. On June 21, 2001, FSHRP signed a 50-year lease with the Army to redevelop and lease these three properties to commercial tenants.

In September 2003, the Army relocated Army South Headquarters from Puerto Rico to Fort Sam Houston, bringing approximately 500 new jobs to San Antonio with an annual economic impact of approximately $200 million. The Army negotiated a lease with the FSHRP to locate U.S. Army South and the Southwest Region Installation Management Agency in the newly renovated historic facilities in the summer of 2004. The continued success of this unique public-private partnership at Fort Sam Houston is critical to assisting the Army in reducing infrastructure support costs, preserving historical assets, promoting economic development opportunities, and generating net cash flow for both the Army and FSHRP.

The potential economic impact from Fort Sam Houston due to the BRAC 2005 expansion is tremendous and projected at nearly $8.3 billion. The economic impact due to the enormous amount of construction taking place on post, to accommodate the new missions, accounts for approximately 80% of the impact ($6.7 billion). While the construction impact will be relatively short-lived, once BRAC 2005 is completed the economic impact from Fort Sam Houston will increase by nearly $1.6 billion annually with additional annual sales tax revenue of $4.9 million. After BRAC 2005 is completed, the increase in personnel and missions at Fort Sam Houston could support the employment of over 15,000 in the community.

Lackland Air Force Base is home to the 37th Training Group and is situated on 9,700 acres, all within the city limits of San Antonio. According to the 2008 Lackland AFB “Facts and Stats” report, over 54,000 military, civilian, student, contractors and military dependents work, receive training or utilize Lackland AFB’s services. On an annual basis, Lackland AFB will graduate 86,000 trainees per year.

In addition, the Air Force still maintains a significant presence at Port San Antonio (the former Kelly Air Force Base) which is adjacent and contiguous with Lackland. The Air Force and the Port jointly utilize the Kelly

A-9 Field runway for military and commercial airfield operations. The Air Force continues to lease over 54 facilities comprising two, 800,000 sq/ft of space and over 270 acres of property. The largest Air Force leaseback is at Building 171, a facility previously closed from the 1995 Base Realignment and Closure of Kelly AFB. Over 6,200 Air Force and other DoD employees will work at this and other facilities on the Port once BRAC 2005 is complete.

Much of the new BRAC 2005 growth occurring on PSA property will be at Building 171. The Air Force is spending $26.5 million to renovate the building, which will house 11 missions. Seven missions and approximately 800 personnel are relocating to the building from Brooks City Base. These include the Air Force Center for Environment Excellence, four medical missions including Air Force Medical Operations Agency and other support missions. Building 171 will also house the new “Cyber” 24th Air Force consisting of approximately 450 personnel and the Air Force Real Property Agency.

The BRAC 2005 growth supports the City’s economic development strategy to promote development in targeted areas of the City, to leverage military installation economic assets to create jobs, and to assist our military installations in reducing base support operating costs. In addition, the Army intends to extend the public-private partnership initiative to include other properties at Fort Sam Houston currently available for redevelopment.

San Antonio recently received funding for two large projects that serve all of the military branches. On September 11, 2007, it was announced that the Veterans Administration will build a new $67 million Level I Polytrauma Center at the Audie L. Murphy Veterans Administration hospital campus. The expansion began in early 2009 and is estimated to be completed in April 2011. These hospitals are designed to be the most advanced in the world and are capable of providing state-of-the art medical care to veterans with multiple serious injuries. San Antonio is also home to the National Trauma Institute (“NTI”), a collaborative military-civilian trauma institute involving SAMMC-North, SAMMC-South, University Hospital, the UTHSC, and the U.S. Army Institute of Surgical Research. The NTI coordinates resources from the institutions to most effectively treat the trauma victims and their families. The NTI received $3.8 million in grants in FY 2008.

Congressional legislation for FY 2009 has been passed by the U.S. House of Representatives and by the U.S. Senate and provides $610 million for Fort Sam Houston.

The San Antonio community has put in place organizations and mechanisms to assist the community and the military with the BRAC 2005 and other military-related issues. The Military Transformation Task Force (“MTTF”) is a City, Bexar County, and Greater San Antonio Chamber of Commerce organization that provides a single integrated voice from the community to the military. The MTTF has five committees: Transportation and Infrastructure, Healthcare Delivery and Medical Partnerships, Economic Development, Neighborhood Revitalization and Local Community Impacts, and Public and Legislative Affairs, each dedicated to working with the community and military on the BRAC 2005 actions. In addition, the MTTF, through the Community Advisory Council, has a seat on the Executive Integration and Oversight Board (“EIOB”) which is the military entity charged with the BRAC 2005 implementation in San Antonio. At EIOB meetings, the community can provide input to the military on the BRAC 2005.

In January 2007, the City established the Office of Military Affairs (“OMA”). The mission of OMA is to prepare the community for the challenges and opportunities associated with BRAC 2005-related growth, work with the military to sustain and enhance mission readiness, and develop and institutionalize relationships between the community and the military on issues of common concern. The OMA is the staff support to the MTTF and worked closely with each MTTF committee to develop a Growth Management Plan for the community in order to adequately prepare for the BRAC 2005 growth in San Antonio. OMA is also working with the local military bases to address incompatible land-use issues in order to enhance mission readiness as well as other issues of common concern to the community and military. Finally, the City and the military have established the Community-Military Advisory Council. This Council will provide a mechanism for local government, business, and military leaders to address issues of common concern.

In June 2009, the City established the “Fort Sam Houston Community Development Office.” The mission of this office is to work with the community and the military to revitalize the neighborhoods around Fort Sam Houston. The office will undertake initiatives in economic development, housing, public safety, and transportation.

A-10 Other Major Industries

Aerospace. According to the Economic Impact Study commissioned by the Greater San Antonio Chamber of Commerce the aerospace industry’s annual economic impact to the City is about $3.8 billion. This industry provides approximately 9,438 jobs, with employees earning total annual wages of over $479 million. The aerospace industry continues to expand as the City leverages its key aerospace assets, which include San Antonio International Airport, Stinson Municipal Airport, Port San Antonio, Randolph AFB, Lackland AFB, and training institutions. Many of the major aerospace industry participants such as Boeing, Lockheed Martin, General Electric, Pratt & Whitney, Raytheon, Cessna, San Antonio Aerospace – a division of Singapore Technologies, Southwest Airlines, American Airlines, Delta Airlines, Continental Airlines, FedEx, UPS, and others, have significant operations in San Antonio. The industry in San Antonio is diversified with continued growth in air passenger service, air cargo, maintenance, repair, overhaul, and general aviation. The Greater San Antonio Chamber of Commerce updates economic impact figures at the request of industry leaders and expects an update completed in the coming year.

San Antonio Aerospace LP (“SAA”) is a subsidiary of ST Aerospace, a global company headquartered in Singapore with over 7,000 employees worldwide, providing aircraft maintenance support services for commercial and military aircraft. SAA began operations in April 2002, after acquiring Dee Howard aircraft maintenance facilities through the bankruptcy court. SAA decided to expand its MRO operations by investing $16 million to construct an 80,000 sq. ft. maintenance hangar, an adjacent 61,500 sq. ft. warehouse, and a 21,000 sq. ft. office building at the Airport. SAA will retain 570 existing jobs and is expected to hire 100 new employees. SAA currently leases 2,106,107 square feet of ground space/hanger space at the San Antonio International Airport, and specializes in commercial MRO work on large aircraft, including Northwest Airlines, Delta, and United Parcel Service.

Applied Research and Development. The Southwest Research Institute is one of the original and largest independent, nonprofit, applied engineering and physical sciences research and development organizations in the U.S., serving industries and governments around the world in the engineering and physical sciences field. Southwest Research Institute has contracts with the Federal Aviation Administration, General Electric, Pratt & Whitney, and other organizations to conduct research on many aspects of aviation, including testing synthetic jet fuel, developing software to assist with jet engine design, and testing turbine safety and materials stability. Southwest Research Institute occupies 1,200 acres and provides nearly two million square feet of laboratories, test facilities, workshops, and offices for more than 3,100 scientists, engineers, and support personnel.

Telecommunications Industry. AT&T, with 310,070 employees worldwide as of August 2008, had approximately 5,300 employees in San Antonio and is home to the company’s Telecom Operations Group. In August 2009, AT&T announced that by the end of 2010 it will open a U-verse service technical support center in San Antonio. The support center will create 200 jobs in San Antonio. AT&T’s U-verse, a broadband, voice and digital cable services, debuted in San Antonio in 2006. Currently, AT&T serves over 16.3 wireless and wired broadband connections, including AT&T U-verse service. The City is partnering with Alamo Colleges to establish a customized training program to develop a pipeline of skilled workers to fill the new AT&T jobs.

Information Technology. A study conducted in 2008 indicates that the Information Technology (“IT”) industry in San Antonio registered an overall economic impact of approximately $8 billion and employs about 15,648 people with a total annual payroll of approximately $882 million. The Greater San Antonio Chamber of Commerce updates economic impact figures at the request of industry leaders and expects an update completed in the coming year. Further, these numbers only include the impact of IT-specific companies. There are also a substantial number of people employed in IT jobs in non-IT companies. For example, the study also found that there are approximately 4,800 IT workers employed in the 20 largest non-IT companies in San Antonio. The IT industry is particularly strong in the areas of information security and government contracting. The “Center for Infrastructure Assurance and Security” at UTSA is one of the leading research and education institutions in the area of information security in the country. In 2005, the U.S. National Security Agency re-designated UTSA as a “National Center of Excellence in Information Assurance” for three academic years. Our Lady of the Lake University also received this designation over the past year. San Antonio is also home to the Air Intelligence Agency, which is the premier IT agency for the U.S. Air Force and the DoD. Lackland Air Force Base was selected as the best location for the 24th Air Force-Cyber Command for its work as a center of information technology, information assurance and information security. San Antonio is rapidly increasing its sector of more than 80

A-11 IT/cyber-related businesses. Recently the NSA, constructed a data center, investing $50 Million, creating 30 new jobs along with 1,500 construction jobs.

Manufacturing Industry. The manufacturing industry in San Antonio employed 52,786 people in 2006, according to an economic impact study. Workers earned an average annual wage of $41,496, and the industry registered an economic impact of $14.4 billion. The Greater San Antonio Chamber of Commerce updates economic impact figures at the request of industry leaders and expects an update completed in the coming year.

Toyota Motor Corp., one of the largest manufacturing employers in San Antonio with an estimated workforce of 1,850, announced that it will be expanding local production to include the Tacoma truck. Toyota is shifting its Tacoma manufacturing from Fremont, California to San Antonio and is expected to create an additional 1,100 new jobs. Toyota and its 18 on-site suppliers are located at the San Antonio’s south side. Toyota also expects the suppliers to add about 1,000 jobs through 2013, bringing the total number of jobs supporting Toyota’s operations to approximately 5,300, with an annual impact of $1.7 Billion and will start ramping up production for Toyota Tacoma in the Summer of 2010.

As a result of recalls earlier this year, the Toyota plant in San Antonio suspended production of the Tundra for one week in March and one week in April to help bring inventory in line with demand. However, Toyota is not laying off any employees and is continuing to ramp up employment to begin the Tacoma production.

Creative Industry. The Creative Industry in San Antonio had a $3.38 billion economic impact, employed 26,744 people, and paid annual wages of over $1 billion in 2006. Recognizing the overall impact of this industry, The Cultural Collaborative: A Plan for San Antonio’s Creative Economy, was created and a strategic plan was developed to provide focus and initiative for the future of this industry. Seventy-eight percent of these strategies have either been fully implemented or are in the process of being implemented. The Strategic Alliance for Business and Economic Research Institute updates the Creative Industry impact and is planning an update in the coming year. ______Sources: The Greater San Antonio Chamber of Commerce; San Antonio Medical Foundation; City of San Antonio, Department of International and Economic Development Department; Convention and Visitors Bureau; and the Strategic Alliance for Business and Economic Research Institute.

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A-12 Growth Indices

San Antonio Electric and Gas Customers

For the Month of December Electric Customers Gas Customers 2000 575,461 305,181 2001 589,426 305,702 2002 594,945 306,503 2003 602,185 306,591 2004 617,261 308,681 2005 638,344 310,699 2006 662,029 314,409 2007 681,312 319,122 2008 693,815 320,407 2009 706,235 321,984 ______Source: CPS.

San Antonio Water System Average Customers per Fiscal Year

Fiscal Year Ended May 31 1, 2 Water Customers 3 2000 285,887 2001 293,299 2002 298,215 2003 303,917 2004 311,556 2005 320,661 2006 331,476 2007 341,220 2008 346,864 2009 350,860 ______1 On April 3, 2001, the SAWS Board of Trustees approved the changing of SAWS’ fiscal year from a year-end of May 31 to December 31. 2 Beginning in year 2001, for the 12 months ending December 31. 3 Excluding SAWS irrigation customers. Source: SAWS.

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A-13 Construction Activity

Set forth below is a table showing building permits issued for construction within the City at December 31 for the years indicated:

Calendar Residential Single Family Residential Multi-Family12 Other Year Permits Valuation Permits Valuation Permits Valuation 1999 5,771 $398,432,375 404 $157,702,704 9,870 $ 911,543,958 2000 5,494 383,084,509 201 81,682,787 10,781 957,808,435 2001 6,132 426,766,091 449 142,506,920 12,732 1,217,217,803 2002 6,347 435,090,131 246 101,680,895 14,326 833,144,271 2003 6,771 521,090,684 141 2,738,551 13,813 1,041,363,980 2004 7,434 825,787,434 206 7,044,283 14,695 1,389,950,935 2005 8,207 943,804,795 347 5,221,672 20,126 1,772,959,286 2006 7,301 890,864,655 560 13,028,440 19,447 1,985,686,296 2007 4,053 617,592,057 29 4,715,380 13,268 2,343,382,743 2008 2,588 396,825,916 13 2,033,067 9,637 2,634,745,310 2009 2,084 311,309,870 50 5,692,447 6,933 1,684,823,866 ______1 Includes two-family duplex projects. 2 Includes commercial building permits, commercial additions, improvements, extensions, and certain residential improvements. Source: City of San Antonio, Department of Development Services.

Total Municipal Sales Tax Collections – Ten Largest Texas Cities

Set forth below in alphabetical order is total municipal sales tax collections for the calendar years indicated:

2009 2008 2007 2006 2005 Amarillo $56,514,269 N/A N/A N/A N/A Arlington 80,170,009 $81,851,457 $80,701,278 $77,179,657 $61,983,154 Austin 131,403,989 147,051,782 147,310,525 133,503,393 118,853,520 Corpus Christi 57,311,248 62,076,566 58,502,801 55,663,395 51,046,479 Dallas 205,447,327 227,067,964 223,708,825 217,223,165 199,585,955 El Paso 64,480,623 67,821,673 64,508,591 60,737,389 54,217,823 Fort Worth 97,877,323 106,259,648 98,863,541 92,739,620 83,754,760 Houston 489,009,133 504,416,610 471,684,021 440,687,609 380,871,932 Plano N/A 64,180,104 63,267,699 62,015,005 53,036,662 Round Rock 58,694,318 69,435,651 66,891,894 60,128,584 50,114,815 SAN ANTONIO 202,966,327 215,808,945 209,599,573 195,966,662 161,951,337 ______Source: State of Texas, Comptroller’s Office.

Education

There are 15 independent school districts within Bexar County with a combined enrollment of 309,930 encompassing 55 high schools, 73 middle/junior high schools, 255 early education/elementary schools, 15 all grade level schools, 10 magnet schools, and 34 alternative schools as of October 2009. There are an additional 28 charter school districts with 68 open enrollment charter schools at all grade levels. In addition, Bexar County has 96 accredited private and parochial schools at all education levels. Generally, students attend school in the districts in which they reside. There is currently no busing between school districts in effect. The six largest accredited and degree-granting universities, which include a medical school, a dental school, a law school, and five public community colleges, had combined enrollments of 109,134 for Fall 2009. ______Source: Texas Education Agency.

A-14 Employment Statistics

The following table shows current nonagricultural employment estimates by industry in the San Antonio MSA for the period of July 2010, as compared to the prior periods of June 2010, and July 2009.

Employment by Industry

San Antonio MSA1 July 2010 June 2010 July 2009 Mining and Logging 3,600 3,500 3,400 Construction 46,300 46,600 48,000 Manufacturing 41,800 41,700 42,200 Trade, Transportation, and Utilities 142,500 142,100 143,300 Information 18,200 18,400 19,400 Financial Activities 65,800 65,500 65,100 Professional and Business Services 98,000 98,900 98,000 Education and Health Services 122,100 123,200 122,400 Leisure and Hospitality 104,600 104,300 105,200 Other Services 30,700 30,700 31,400 Government 155,700 162,200 151,700 Total Nonagricultural Employment 829,300 837,100 830,100 ______1 Based on Labor Market Information Department, Texas Workforce Commission (model-based methodology).

The following table shows civilian labor force estimates, the number of persons employed, the number of persons unemployed, and the unemployment rate in the San Antonio MSA, Texas, and the United States for the period of July 2010, as compared to the prior periods of June 2010, and July 2009.

Unemployment Information (all estimates are in thousands)

San Antonio MSA1 July 2010 June 2010 July 2009 Civilian Labor Force 985.2 983.4 978.7 Number of Employed 908.9 907.8 907.7 Number of Unemployed 76.3 75.6 71.0 Unemployment Rate % 7.7 7.7 7.3

Texas (Actual)1 July 2010 June 2010 July 2009 Civilian Labor Force 12,206.4 12,176.7 12,063.1 Number of Employed 11,168.3 11,136.6 11,063.9 Number of Unemployed 1,038.1 1,040.1 999.2 Unemployment Rate % 8.5 8.5 8.3

United States (Actual)1 July 2010 June 2010 July 2009 Civilian Labor Force 155,270.0 154,767.0 156,255.0 Number of Employed 140,134.0 139,882.0 141,055.0 Number of Unemployed 15,137.0 14,885.0 15,201.0 Unemployment Rate % 9.7 9.6 9.7 ______1 Based on Labor Market Information Department, Texas Workforce Commission (model-based methodology).

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A-15 San Antonio Electric and Gas Systems

San Antonio Electric and Gas Systems are covered in the body of this Remarketing Memorandum.

San Antonio Water System

History and Management

In 1992, the City Council consolidated all of the City’s water-related functions, agencies, and activities into one agency. This action was taken due to the myriad of issues confronting the City related to the development and protection of its water resources. The consolidation provided the City with a single, unified voice of representation when promoting or defending the City’s goals and objectives for water resource protection, planning, and development with local, regional, state, and federal water authorities and officials.

Final City Council approval for the consolidation was given on April 30, 1992 with the approval of Ordinance No. 75686 (the “System Ordinance”), which created the City’s water system (“SAWS”) into a single, unified system consisting of the former City departments comprising the waterworks, wastewater, and water reuse systems, together with all future improvements and additions thereto, and all replacements thereof. In addition, the System Ordinance authorizes the City to incorporate into SAWS a stormwater system and any other water-related system to the extent permitted by law.

The City believes that establishing SAWS has helped to reduce the costs of operating, maintaining, and expanding the water systems and has allowed the City greater flexibility in meeting future financing requirements. More importantly, it has allowed the City to develop, implement, and plan for its water needs through one agency.

The complete management and control of SAWS is vested in a board of trustees (the “SAWS Board”) currently consisting of seven members, including the City’s Mayor and six persons who are residents of the City or reside within the SAWS service area. With the exception of the Mayor, all SAWS Board members are appointed by the City Council for four-year staggered terms and are eligible for reappointment for one additional four-year term. Four SAWS Board members must be appointed from four different quadrants in the City, and two SAWS Board members are appointed from the City’s north and south sides, respectively. SAWS Board membership specifications are subject to future change by City Council.

With the exception of fixing rates and charges for services rendered by SAWS, condemnation proceedings, and the issuance of debt, the SAWS Board has absolute and complete authority to control, manage, and operate SAWS, including the expenditure and application of gross revenues, the authority to make rules and regulations governing furnishing services to customers, and their subsequent payment for SAWS’ services, along with the discontinuance of such services upon the customer’s failure to pay for the same. The SAWS Board, to the extent authorized by law and subject to certain various exceptions, also has authority to make extensions, improvements, and additions to SAWS and to acquire, by purchase or otherwise, properties of every kind in connection therewith.

Service Area

SAWS provides water and wastewater service to the majority of the population within the corporate limits of the City and Bexar County, which totals approximately 1.6 million residents. SAWS employs approximately 1,700 personnel and maintains over 10,000 miles of water and sewer mains. The tables that follow show historical water consumption and water consumption by class for the fiscal years indicated.

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A-16 Historical Water Consumption (Million Gallons) (1)

Total Direct Rate Gallons of Gallons of Gallons of Average Gallons of Water Sewer Fiscal Water Water Water Percent Wastewater Base Usage Base Usage Year Production(b) Usage Unbilled Unbilled Treated Rate(c) Rate (d) Rate (e) Rate (f) 2009 60,646 55,391 5,255 8.67% 51,987 $6.77 $20.04 $7.76 $9.63 2008 67,523 58,828 8,695 12.88% 50,347 6.56 19.92 7.37 9.14 2007 55,043 49,511 5,532 10.05% 49,218 6.56 19.59 7.37 9.14 2006 63,388 57,724 5,664 8.94% 53,268 6.56 19.69 7.37 9.14 2005 58,990 55,005 3,985 6.76% 49,287 6.11 18.42 7.33 9.10 2004 51,231 49,366 1,865 3.64% 49,593 5.61 15.47 6.60 8.19 2003 55,039 50,576 4,463 8.11% 49,669 5.61 13.20 5.70 7.14 2002 52,691 51,850 841 1.60% 52,180 5.61 11.97 5.70 7.14 2001(a) 36,883 34,716 2,167 5.88% 29,561 5.61 9.19 5.70 7.14 2001 57,243 53,047 4,196 7.33% 52,344 5.61 9.19 5.70 7.14 ______(1) Unaudited. (a) Seven months ended December 31, 2001. In 2001, the SAWS Board of Trustees approved a change in the fiscal year-end from May 31st to December 31st. (b) Pumpage is total potable water production less Aquifer Storage and Recovery recharge. (c) Rate shown is for 5/8” meters. (d) Represents standard (non-seasonal) usage charge for monthly residential water usage of 7,788 gallons per month. Includes water supply and EAA fees. (e) Minimum service availability charge (includes charge for first 1,496 gallons). (f) Represents usage charge for a residential customer based on winter average water consumption of 6,178 gallons per month. Source: SAWS.

Water Consumption by Customer Class (Million Gallons) (1) ____ Fiscal Year Ended December 31 2009 2008 2007 2006 2005 2004 2003 2002 2001(a) 2001 Water Sales (b): Residential Class 30,667 33,026 26,651 33,162 30,917 27,054 27,624 28,227 19,398 28,621 General Class 20,309 20,296 19,166 20,232 19,769 18,851 19,464 20,155 13,444 23,042 Wholesale Class 119 108 90 114 121 98 137 173 347 535 Irrigation Class 4,200 5,398 3,604 4,216 4,198 3,364 3,350 3,295 1,527 848 Total Water 55,295 58,828 49,511 57,724 55,005 49,367 50,575 51,850 34,716 53,046

Wastewater Sales: Residential Class 29,825 28,148 27,384 28,857 25,293 25,421 24,860 25,564 13,594 26,472 General Class 19,714 19,609 18,670 21,152 21,414 20,952 21,418 22,319 13,209 21,516 Wholesale Class 2,448 2,590 3,164 3,259 2,580 3,220 3,391 4,297 2,758 4,356 Total Wastewater 51,987 50,347 49,218 53,268 49,287 49,593 49,669 52,180 29,561 52,344

Conservation - Residential Class (c) 3,469 3,948 2,432 4,276 3,613 2,634 2,636 2,742 2,757 1,460 Recycled Water Sales 16,321 16,559 14,148 14,835 14,048 13,626 13,642 13,761 4,654 13,292 ______(1) Unaudited. (a) Seven months ended December 31, 2001. In 2001, the SAWS Board of Trustees approved a change in the fiscal year end from May 31st to December 31st. (b) Water Supply and EAA fees are billed based on the gallons billed for water sales. (c) Gallons billed for conservation are included in the gallons billed for water sales. Source: SAWS.

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A-17 SAWS System

SAWS includes all water resources, properties, facilities, and plants owned, operated, and maintained by the City relating to supply, storage, treatment, transmission, and distribution of treated potable water, chilled water, and steam (collectively, the “waterworks system”), collection and treatment of wastewater (the “wastewater system”), and treatment and recycle of wastewater (the “recycle water system”) (the waterworks system, the wastewater system, and the recycle water system, collectively, the “System”). The System does not include any “Special Projects,” which are declared by the City, upon the recommendation of the SAWS Board, not to be part of the System and are financed with obligations payable from sources other than ad valorem taxes, certain specified revenues, or any water or water-related properties and facilities owned by the City as part of its electric and gas system.

In addition to the water-related utilities that the SAWS Board has under its control, on May 13, 1993, the City Council approved an ordinance establishing initial responsibilities over the stormwater quality program with the SAWS Board and adopted a schedule of rates to be charged for stormwater drainage services and programs. As of the date hereof, the stormwater program is not deemed to be a part of the System.

SAWS’ operating revenues are provided by its four core businesses: Water Delivery, Water Supply, Wastewater, and Chilled Water and Steam. The SAWS rate structure is designed to provide a balance between residential and business rates and strengthen conservation pricing for all water users. For detailed information on the current rates charged by SAWS, see www.saws.org/service/rates.

Waterworks System. The City originally acquired its waterworks system in 1925 through the acquisition of the San Antonio Water Supply Company, a privately owned company. Since such time and until the creation of SAWS in 1992, management and operation of the waterworks system was under the control of the City Water Board. The SAWS’ waterworks system currently extends over approximately 636 square miles, making it the largest water purveyor in Bexar County. SAWS serves more than 80% of the water utility customers in Bexar County. As of December 31, 2009, SAWS provided potable water service to approximately 352,000 customer connections, which includes residential, commercial, multifamily, industrial, and wholesale accounts. To service its customers, the waterworks system utilizes 30 elevated storage tanks and 30 ground storage reservoirs, of which 7 act as both, with combined storage capacities of 168 million gallons. As of December 31, 2009, the waterworks system had in place 4,866 miles of distribution mains, ranging in size from four to 60 inches in diameter (the majority being between six and 12 inches), and 26,599 fire hydrants distributed evenly throughout the SAWS service area.

Wastewater System. The San Antonio City Council created the City Wastewater System in 1894. A major sewer system expansion program began in 1960 with bond proceeds that provided for new treatment facilities and an enlargement of the wastewater system. In 1970, the City became the Regional Agent of the Texas Commission on Environmental Quality (“TCEQ”) (formerly known as the Texas Water Commission and the Texas Water Quality Board). In 1992, the wastewater system was consolidated with the City’s waterworks and recycle water system to form the System.

SAWS serves a substantial portion of the residents of the City, 12 governmental entities, and other customers outside the corporate limits of the City. As Regional Agent, SAWS has certain prescribed boundaries that currently cover an area of approximately 424 square miles. SAWS also coordinates with the City for wastewater planning for the City’s total planning area, ETJ, of approximately 1,107 square miles. The population for this planning area is approximately 1.6 million people. As of December 31, 2009, SAWS provided wastewater services to approximately 395,100 customers.

In addition to the treatment facilities owned by SAWS, there are six privately owned and operated sewage and treatment plants within the City’s ETJ.

The wastewater system is composed of approximately 5,085 miles of mains and three major treatment plants, Dos Rios, Leon Creek, and Medio Creek. All three plants are conventional activated sludge facilities. SAWS holds Texas Pollutant Discharge Elimination System wastewater discharge permits, issued by the TCEQ for 187 million gallons per day (“MGD”) in treatment capacity and 46 MGD in reserve permit capacity. The permitted

A-18 flows from the wastewater system’s three regional treatment plants represent approximately 98% of the municipal discharge within the City’s ETJ.

SAWS has applied to the TCEQ to expand its Certificates of Convenience and Necessity (“CCN”) or service areas for water and sewer from the existing boundaries to the ETJ boundary of the City. When the TCEQ grants a CCN to a water or sewer purveyor, it provides that purveyor with a monopoly for retail service. By expanding the CCN’s to the ETJ, developments needing retail water and sewer service within the ETJ must apply to SAWS. Service can then be provided according to SAWS standards and small, undersized systems can be avoided. SAWS’ CCN application for water consists of 12 separate applications that cover approximately 64,000 acres and the applications for sewer consisted of eight separate applications that cover approximately 407,000 acres. Of the water applications, five applications have been finalized consisting of approximately 8,100 acres, which is now included in SAWS’ CCN, with the remaining seven applications totaling 56,000 acres still under review. The eight sewer applications are currently under review. The expansion of the CCN to the ETJ supports development regulations for the City. Within the ETJ, the City has certain standards for development. These standards somewhat insure the City that areas developed in the ETJ and then annexed by the City, will already have some City development regulations in place.

Recycling Water System. SAWS is authorized to provide Type I (higher quality) recycled water from its wastewater treatment plants and has been doing so since 2000. The water recycling program is designed to provide up to 35,000 acre-feet (“af”) per year of recycled water to commercial and industrial businesses in San Antonio. This system was originally comprised of two north/south transmission lines. In 2008, an interconnection of these two lines was constructed at the north end of the lines, providing additional flexibility with respect to this valuable water resource. Currently, approximately 125 miles of pipeline deliver highly treated effluent to over 52 customers consisting of golf courses, universities, parks, and commercial and industrial customers throughout the city. The system was also designed to provide baseflows in the upper San Antonio River and Salado Creek, and the result has been significant and lasting environmental improvements for the aquatic ecosystems in these streams.

Chilled Water and Steam System. SAWS owns, operates, and maintains six thermal energy facilities providing chilled water and steam services to governmental and private entities. Two of the facilities, located in the City’s downtown area, provide chilled water and/or steam service to 23 customers. Various City facilities, that include the Henry B. Gonzalez Convention Center and Alamodome, constitute a large percentage of the downtown system’s chilled water and steam annual production requirements. In addition to these City facilities, the two central plants also provide chill water and/or steam service to a number of major hotels in the downtown area include the Grand Hyatt, Marriott and the Hilton Palacio Del Rio. The other four central thermal energy facilities, owned and operated by SAWS, are located at the Port of San Antonio (formerly Kelly AFB) and provide chilled water and steam services to large industrial customers that include Lockheed Martin and Boeing Aerospace. SAWS’ chilled water-producing capacity places it as one of the largest producers of chilled water in the immediate south Texas area. SAWS also currently operates and maintains the central thermal energy plants at Brooks City-Base under an agreement with the Brooks Development Authority.

Stormwater System. In September 1997, the City created its Municipal Drainage Utility and established its Municipal Drainage Utility Fund to capture revenues and expenditures for services related to the management of the municipal drainage activity in response to Environmental Protection Agency-mandated stormwater runoff and treatment requirements under the 40 CFR 122.26. The City, along with SAWS, has the responsibility, pursuant to the Permit from the TCEQ, for water-quality monitoring and maintenance. The City and SAWS have entered into an interlocal agreement to set forth the specific responsibilities of each regarding the implementation of the requirements under the Permit. The approved annual budget for the SAWS share of program responsibilities for FY 2010 is $4,809,147, for which SAWS is reimbursed $3,758,241 from the stormwater utility fee imposed by the City.

Water Supply

In May 2009, the System completed a comprehensive analysis of its existing water supply projects and developed a series of conservation and water resource strategies that will enable it to provide adequate water supplies, even during critical drought periods; postpone dependence on more costly resources, when possible; promote greater use of non-Edwards Aquifer supplies in the long-term; fulfill the needs of San Antonio customers, and recognize the reality that future water supplies must be affordable.

A-19 These strategies are outlined in the 2009 Water Management Plan. The 2009 Plan is a continuation of the process that began in 1996 to develop a 50-year plan. In 1996, the City Council appointed a 34-member citizens committee to develop strategic policies and goals for water resource management. The Citizens Committee on Water Policy report, entitled “A Framework for Progress: Recommended Water Policy Strategy for the San Antonio Area,” was unanimously accepted by City Council, becoming the foundation for the System’s “Water Resources Plan.” On November 5, 1998, the City Council accepted the Water Resources Plan “Securing Our Water Future Together” as the first comprehensive widely supported water resource plan for San Antonio. The 1998 Plan established programs for immediate implementation, as well as a process for developing long-term water resources. In October 2000, the City Council created a permanent funding mechanism (known as the Water Supply Fee) for water supply development and water quality protection. The Water Supply Fee provides a specific fund for the development of water resources.

In August 2005, SAWS’ Board of Trustees unanimously approved the 2005 Update. The 2005 Update is a comprehensive review of the assumptions governing population and per capita consumption projections in Bexar County through 2050. The 2005 Update includes an analysis of each water supply alternative available for meeting future needs and demonstrates SAWS’ commitment to obtaining additional water supplies. The projected capital cost of the water supply approved in the 2005 Update originally totaled more than $2 billion; however, more recent cost re-estimates have increased this amount to more than $3 billion. As a result of some of the identified cost increases, other potential changes in the projects, and changes in personnel, a new Water Supply Task Force was assembled in June 2008 to review, evaluate, and update SAWS’ Water Resource plan. This task force completed its review in early 2009. After a comprehensive public outreach period, the Board of Trustees and the City Council of San Antonio approved the 2009 Water Management Plan in May 2009.

The 2009 Water Management Plan outlines a diversified foundation of San Antonio’s water supply. While the Edwards Aquifer will always be the cornerstone of San Antonio’s water supply, the System has already successfully developed several alternative water sources, such as Canyon Lake, the Trinity Aquifer, and the Carrizo Aquifer. The System’s recycled water program provides highly treated wastewater to CPS and other industrial customers who would otherwise use potable water. The System’s underground Aquifer Storage and Recovery reservoir allows us to collect unused Edwards Aquifer water during wet years and use it in times of drought.

As of December 31, 2009, the System utilizes the following water supplies, Edwards Aquifer, 251,411 af which represents 59% of the System’s total supply, Aquifer Storage and Recovery underground storage, 67,000 af or 16% of total supply, Recycle Water to CPS, 50,000 af or 12% of total supply, Recycle Water to other customers, 35,000 af or 8% of total supply, Canyon Lake, 9,300 af or 2% of total supply, Carrizo Aquifer, 6,400 af or 2% of total supply, and Trinity Aquifer, 3,500 af or 1% of total supply.

Edwards Aquifer

Historically, the City obtained nearly all of its water from the Edwards Aquifer. The Edwards Aquifer lies beneath an area approximately 3,600 square miles in size. Including its recharge zone, it underlies all or part of 13 counties, varying from five to 30 miles in width, and stretching over 175 miles in length, beginning in Brackettville, Kinney County, Texas, in the west and stretching to Kyle, Hays County, Texas, in the east. The Edwards Aquifer receives most of its water from rainfall runoff, rivers, and streams flowing across the 4,400 square miles of drainage basins located above it.

Much of the Edwards Aquifer region consists of agricultural land, but it also includes areas of population ranging from communities with only a few hundred residents to the City, which serves as a home for well over one million residents. In 2009, the Edwards Aquifer supplied 90% of the potable water for municipal, domestic, industrial, and commercial needs for the SAWS service area. Naturally occurring artesian springs, such as the Comal Springs and the San Marcos Springs, are fed by Edwards Aquifer water and are utilized for commercial, municipal, agricultural, and recreational purposes, while at the same time supporting ecological systems containing rare and unique aquatic life.

The Edwards Aquifer is recharged by seepage from streams and by precipitation infiltrating directly into the cavernous, honeycombed, limestone outcroppings in its north and northwestern areas. Practically continuous recharge is furnished by spring-fed streams, with stormwater runoff adding additional recharge, as well. The

A-20 historical annual recharge, from 1934 to the present, to the reservoir is approximately 684,700 af. The average annual recharge over the last four decades is approximately 797,900 af. The lowest recorded recharge was 43,000 af in 1956, while the highest was 2,485,000 af in 1992. Recharge has been increased by the construction of recharge dams over an area of the Edwards Aquifer exposed to the surface known as the recharge zone. The recharge dams, or flood-retarding structures, slow floodwaters and allow much of the water that would have otherwise bypassed the recharge zone to infiltrate the Edwards Aquifer.

In 1993, the Texas Legislature created the Edwards Aquifer Authority (“EAA”) to manage groundwater withdrawals from the Edwards Aquifer through a permitting system and to provide for appropriate springflow during drought periods. As a consequence of the EAA’s permitting regime, SAWS’ access to Edwards Aquifer supplies is now limited to its historic use plus any additional supplies SAWS can acquire by lease or purchase. All Edwards Aquifer supplies are subject to regulation, with more stringent use limitations applied during periods of drought.

In 2007, the Texas Legislature passed Senate Bill 3, which established a new pumping cap and placed restrictions on supply availability during drought periods into State statute. Senate Bill 3 established a regional pumping cap of 572,000 af. As of December 31, 2009, through permitting, purchases, and leases, SAWS has access to 251,411 af of Edwards Aquifer water rights, which is approximately 44% of the regional pumping cap. Senate Bill 3 incorporates restrictions on supply availability during drought periods into State statute, thus making these restrictions State law. Under current law, when aquifer levels or springflow fall to certain trigger points, pumping allocations are reduced by 20% to 40% depending on the severity of the drought. In February 2009, City Ordinances were updated to ensure that restrictions on water usage commence in close proximity to the occurrence of these restrictions on pumping. In addition, to support ongoing efforts to identify and evaluate methods to protect threatened and endangered species, the State Legislature prescribed in detail an Edwards Aquifer Recovery Implementation Plan (“EARIP”) for the Edwards Aquifer region. The EARIP, which will be undertaken in coordination with U.S. Fish and Wildlife Service, is intended to balance the recovery of the listed species with water use and development through a multi-stakeholder process with a Habitat Conservation Plan as the intended result. The program is scheduled to be completed by the end of 2012. The process could result in additional reductions on pumping during periods of drought. As part of its Water Management Plan for 2009, the System will continue its effort to maintain the extent of its leased water (37,000 af) through lease renewal or purchase during the entirety of the plan. In addition, the System will seek to add 2,000 af per year through purchases beginning in 2009 and continuing through 2014.

The Plan also identifies the potential lease or purchase of an additional 11,700 af of Edwards Aquifer water in the period between 2014 and 2034 if alternate water sources such as the Regional Carrizo or additional Brackish Groundwater are not available as expected.

Throughout 2009, SAWS has been very active in acquiring additional Edwards Aquifer water rights through either lease or purchase with a total of more than 26,000 af of Edwards Aquifer permits added to SAWS’ inventory over the course of the year. As of December 31, 2009, SAWS’ total inventory of Edwards Aquifer permitted rights stand at 251,411, with approximately 220,000 af of this inventory owned and the remainder leased. As a result of the increased amount of Edwards permits, SAWS was able to add more than 15,500 af of water to the Aquifer Storage and Recovery (“ASR”), bringing the total amassed storage to more than 67,000 af as of December 31, 2009.

Edwards Aquifer Recharge Initiatives

Recharge dams are structures that retain rainfall runoff water for short periods of time over the Edwards Aquifer Recharge Zone. Recharge dams retain storm runoff and retain it long enough to allow for a larger volume of water to enter into the Edwards Aquifer. During storm events, storm runoff flows at a faster rate than what can be taken by the recharge features located in the stream channels. The recharge dam allows for a longer retention for more water to filter into the Edwards Aquifer, thus increasing recharge amounts.

SAWS is evaluating the feasibility of the development of recharge structures in the Cibolo Creek Watershed and the Nueces River Basin in concert with a host of local agencies, including the Guadalupe-Blanco

A-21 River Authority, San Antonio River Authority, and the U.S. Army Corps of Engineers. Feasibility analyses continued to refine sites for potential dams, evaluate surface water storage potential, and prepare for environmental permitting.

The 2009 Water Management Plan calls for the System to continue to cooperate with other Regional entities to complete the studies and construct a Recharge Project to produce over 13,400 af of water by 2020.

Recharge and Recirculation

SAWS partnered with EAA to fund the Recharge and Recirculation: Edwards Aquifer Optimization Program, Phase III and IV Report. This report indicates that considerable potential exists to extend the concept of recharge of the Edwards Aquifer to the idea of applying recharge at specific places in the Aquifer where, because of the geologic characteristics of these locations, this recharge will provide long-term enhancement of Edwards Aquifer water levels and springflow.

Increased Edwards Aquifer levels and springflow during drought periods could decrease the necessity of declaring drought restrictions by the Edwards Aquifer Authority through increased (higher) aquifer water levels and provide minimum springflow to help protect endangered species. SAWS could be rewarded for building a Recharge and Recirculation Project by receiving access to increased Edwards Aquifer water during drought periods.

Costs and extent of the water resources that will be available from the Project are undetermined at this time, but the potential is high enough that the Recharge and Recirculation Project is included as a project for consideration in the 2014-2034 mid-term period in the 2009 Water Management Plan.

Trinity Aquifer Projects

SAWS reached a milestone in February 2002 with the introduction of the first non-Edwards drinking water supply from the Lower Glen Rose/Cow Creek formation of the Trinity Aquifer in northern Bexar County. The System has wholesale contracts with Massah Corporation (“Oliver Ranch”) and Sneckner Partners, Ltd. (“BSR Water Company”) for delivery of up to 5,000 af per year of non-Edwards groundwater from the Trinity Aquifer from two properties located in north-central Bexar County. The construction cost to produce and deliver this water supply is approximately $15.8 million. Initial delivery of water from the Oliver Ranch project began in February 25, 2002 with BSR Water Company wells 1 and 2 production commencing in July 2003. The BSR Water Company project was fully operational in June 2004 with the connection of BSR Water Company wells 3 and 4 to SAWS’ distribution system.

In 2007, production from Oliver Ranch and BSR Water Company projects was 3,126 af, while in 2008, production from these combined projects totaled 3,422 af. As a result of the severe drought conditions experienced across the region the first eight months of the year, 2009 production totaled 1,739 af. The 2009 Water Management Plan identifies that 3,500 af of water will be obtained from Trinity Aquifer sources in normal rainfall years. In severe drought, the 2009 Water Management Plan acknowledges that the Trinity Aquifer water may not be available.

Lower Colorado River Authority Project

The Lower Colorado River Authority-San Antonio Water System (“LCRA-SAWS”) Water Project was conceived to develop and make available up to 150,000 af per year of surface water supplies for San Antonio in 2025 while firming up water supplies in the Colorado River Basin. In 2001, legislation was passed to authorize LCRA to sell water outside its statutory boundary to SAWS. SAWS and LCRA executed a definitive agreement (2002) outlining LCRA’s and SAWS’ obligations The agreement calls for a multi-year study period, at the end of which both SAWS and LCRA will determine whether or not to proceed with implementation of the project. SAWS and LCRA are now entering the sixth year of the study period to assess the environmental, engineering, and cost impacts. Finalization of studies and obtaining appropriate permits for the project are expected to be completed between 2013 and 2015.

A-22 Throughout the study period, SAWS and LCRA evaluate the Project’s viability on an ongoing basis. Specific legislative criteria (Texas Water Code § 222.030) must be met before any water is transferred from the Colorado River basin. Among other requirements, the project must provide for beneficial inflow sufficient to maintain the ecologic health and productivity of the Matagorda Bay System; protect and benefit the lower Colorado River Basin; raise the highland lake levels; and provide for a broad, public, and scientific review process. In 2008, research activities focused on development of bay health species and inflow criteria; water quality; instream flow criteria; agricultural conservation; groundwater development; socioeconomic considerations; waterfowl; surface water availability modeling; the identification of a preferred alternative site for the location of an off-channel storage facility and river intake facility; the transportation system, treatment, and integration system from the LCRA basin boundary to San Antonio; and project permitting.

In December 2008, the LCRA Board of Directors adopted several water supply planning guidance resolutions which led to a conclusion by LCRA that there would be no firm water supply available for San Antonio from the planned project. In a series of meetings and letters over the next four months, SAWS conveyed to LCRA SAWS’ belief that this action by the LCRA Board was inconsistent with the Definitive Agreement between the parties. On May 5, 2009, SAWS’ Board of Trustees declared LCRA in breach of the 2002 Definitive Agreement and directed SAWS staff to pursue all available remedies for the breach. The parties conducted formal mediation on August 5, 2009, but the mediation was unsuccessful. SAWS filed suit against LCRA on August 24, 2009, in the 200th Judicial District Court of Travis County, Texas. The cause number is D-6N-09-002760, styled City of San Antonio, Acting by and Through the San Antonio Water System vs. Lower Colorado River Authority, et al. LCRA filed a Plea to the Jurisdiction and Original Answer on September 25, 2009, asserting full or partial governmental immunity from suit and generally denying that it has breached the Definitive Agreement. On February 1, 2010, the district judge ruled in favor of LCRA by granting LCRA’s Plea to the Jurisdiction in agreement with LCRA’s contention that its sovereign status immunized it from suit by SAWS, dismissing the System’s lawsuit. On February 17, 2010, SAWS filed an appeal to the Court of Appeals for the Third Appellant District of Texas in Austin, Texas. Following a decision by the Court of Appeals, either party may further appeal to the Supreme Court of Texas. However, consideration by the Supreme Court is discretionary with the Court and may be refused. Resolution of the appeal on the issue of governmental immunity is expected to take from two to five years, although the time is very difficult to predict.

During the course of the study and planning periods since 2002, SAWS incurred certain costs with respect to the design of the pipeline which was to be utilized to transport water from the LCRA basin boundary to San Antonio. These costs totaling $2.7 million were recorded as an asset on SAWS’ balance sheet. Given the uncertain nature of this project at the current time, SAWS is currently in the process of evaluating any potential impairment to this asset. Should it ultimately be determined that this asset has suffered a permanent, unrecoverable impairment it will be written down to its fair value, which is likely to be $0.

The 2009 Water Management Plan calls for one or more of several Water Resources Projects to provide at least 75,600 af of water to meet SAWS’ long-term water needs in approximately 2060. In addition to the LCRA- SAWS Project, Seawater Desalination, an additional Aquifer Storage and Recover project, and other Water Supplies were listed as options.

Bexar County Aquifer Storage and Recovery

An ASR project involves injecting ground or surface water into an aquifer, storing it, and later retrieving it for use. Essentially, it accomplishes storage that is traditionally provided through surface water reservoirs without the concern of evaporation. The ASR is primarily designed to optimize use of water from the Edwards Aquifer and may be expanded to inject water from currently planned water supply projects. In December 2002, the Evergreen Underground Water Conservation District and SAWS approved an Aquifer Protection and Management Agreement. This agreement ensures operation of the ASR site if the property is annexed into the district, manages groundwater production, and commits SAWS to monitoring water levels and mitigation of potential negative impacts.

SAWS began a study of an ASR project in 1996, acquired 3,200 acres in southern Bexar County, and has completed construction of Phase I of the $125 million ASR project and the approximately $60 million “integration facilities” to transport this water into SAWS’ distribution system. Phase I of the project was dedicated on June 18, 2004 and gives SAWS the ability to inject or recover up to 30,000 af of Edwards Aquifer water per year.

A-23 In 2006, the ASR was an integral component of SAWS’ drought management strategy. Approximately 5,800 af of supplies were withdrawn primarily during the hot, dry summer months in order to reduce peak demand during the drought period. Effective scheduling and use of this additional inventory enabled SAWS to ensure its compliance with the EAA’s rules for groundwater withdrawals.

In 2008, SAWS continued capital improvements to complete Phase II of the project, which involved well field expansion through the completion of 13 additional wells, the addition of a 7.5 million gallon tank, and the addition of various pumping facilities, among other improvements. The $55 million Phase II expansion was completed in 2009 and effectively doubled SAWS’ ability to inject or recover Edwards Aquifer to 55,000 af per year. While underway, SAWS has continued to store water in the ASR. During July 2008, ASR was again recovered and returned to SAWS’ distribution system when the Edwards Aquifer Authority implemented water restrictions. SAWS’ ASR facility was recognized in 2007 by the National Groundwater Association as the “2007 Outstanding Groundwater Project.”

In the 2009 Water Management Plan, ASR’s role has been expanded with the decision to transition this facility to a long-term storage reserve. In addition, the 2009 Water Management Plan refers to expansion of ASR storage capability as a long-term strategy to optimize available water resources. A study commenced in 2009 to determine the total storage capability of the current ASR site and options for additional sites that would increase the ASR storage capability two times or more. As of December 31, 2009, SAWS had amassed rent storage of more than 67,000 af of water that will be used in long-term drought situations to help meet SAWS water needs. SAWS will continue to store water when it is available and recover water when required during drought.

Western Canyon Project

SAWS, Comal and Kendall County participants, and the Guadalupe-Blanco River Authority (“GBRA”) are working together on the Western Canyon Project for the delivery of water from Canyon Lake Reservoir. GBRA is required through a contract to divert, treat and deliver the water to a certain point into SAWS’ delivery system. SAWS will initially receive over 9,000 af per year for service to northern Bexar County. Over time, this amount will decline to 4,000 af, as GBRA’s in-district participants in the project complete infrastructure necessary to enable them to obtain supplies and growth allows the participants to utilize their full allotment of reserved water.

SAWS began receiving water from this project in April 2006. In 2006, SAWS received 4,957 af of supplies from this project. In 2007, SAWS produced approximately 7,597 af of supplies from this project, in addition to completing the addition of a storage tank and integration pipeline to facilitate delivery of this supply into the SAWS distribution system. In 2008, 8,943 af was delivered from this project. In 2009, SAWS received 8,734 af of water from this project. Pursuant to the terms of the contract with GBRA, this contract will terminate in 2037, with an option to extend until 2077 under new payment terms.

Brackish Groundwater Desalination Project

Such a project is well suited for the south central Texas region, which contains more than 300,000,000 af of brackish groundwater. Hydrologic research on the sustainability of supply and water quality parameters began in December 2005. The 2009 Water Management Plan calls for completion of a brackish water desalination plan to produce 11,800 af of potable water per year by 2014. The plan will rely on brackish water pumped from Bexar County. The plan also makes provision for the Project to include other water from Wilson and Atascosa Counties to provide at least an additional 11,700 af by 2034, depending on how other mid-range Projects develop.

In 2007 and 2008, the System continued its hydrogeologic evaluation on four (4) test sites in the saline portions of the Edwards and Wilcox Aquifers in Atascosa and Bexar Counties. The hydrogeologic evaluation involves the construction of test and monitoring wells that will provide an indication of the firm supply of water available for the project and the impacts of the System’s production on the Carrizo-Wilcox Aquifer system. The data obtained from the tests and monitoring wells will support the evaluation of various pre-treatment, treatment, and concentrate management strategies.

The majority of feasibility work for the brackish groundwater desalination project was completed in 2008. Raw water quality is favorable for development of a desalination facility and there is sufficient raw water to support

A-24 a plant for greater than 50 years. The reverse osmosis treatment plant will be located in southern Bexar County on property owned by the System. Water from the desalination plant will be integrated by pipeline into the northwest portion of San Antonio. Reverse osmosis pilot testing has been completed. A test report will be submitted to the Texas Commission on Environmental Quality (“TCEQ”) in early May 2010 for review and approval. Deep well injection is proposed for the concentrate disposal.

Carrizo Aquifer Projects

The 2009 Water Management Plan includes the Regional Carrizo Project to obtain 11,687 af from the Carrizo Aquifer in Gonzales County in time to meet mid-term needs of the System.

Development of the Carrizo Aquifer project depends upon issuance of permits for groundwater drilling, production, and transport from local groundwater conservation districts. The System submitted an initial, consolidated permit application for production and transportation permits for 11,687 af to the Gonzales County Underground Water Conservation District (the “GCUWD”) in June 2006. Pursuant to GCUWD rules, production permits have a term of five years, after which a renewed permit may be issued upon application, subject to the notice and hearing requirements applicable to permit applications. The applications were declared administratively complete on July 12, 2006 and contested by several parties on October 10, 2006.

Throughout 2007, 2008, and 2009, SAWS participated in several public hearings and multiple mediation sessions as part of the contested case hearing process. The contested case hearing took place October 5-13, 2009 and December 4, 2009 in Gonzales, Texas. Mediation sessions were held on December 18, 2009 and February 3, 2010 resulting in three entities dropping their protests of SAWS applications. The entities continue to oppose the applications. Resolution is anticipated in early to mid-2010 with design and construction activities commencing soon after permits are issued.

SAWS is also exploring the possibility of partnering with other agencies that either produce or will produce water in Gonzales County. These efforts would explore transporting water from Gonzales County to Bexar County or near Bexar County in order to share costs and reduce the cost of obtaining water for all participants. Discussions are on-going.

Local Carrizo Water Supply Project

A provision of the 2002 Water Resource Protection and Management Agreement with the Evergreen Underground Water Conservation District gives SAWS the ability to withdraw up to 2 af of Carrizo Aquifer water per surface acre of land owned or leased (controlled). This equates to approximately 6,400 af of Carrizo Aquifer production per year. Thus, in 2006, SAWS initiated the Local Carrizo Program at the ASR site with dual goals in mind. The first was to provide SAWS with access to approximately 6,400 af of Carrizo Aquifer water, while the second was to counter the natural south-southeast drift of the stored Edwards Aquifer water away from the ASR wellfield with water wells drilled north-northwest of the stored Edwards Aquifer water.

The approximately $17 million Local Carrizo Water Supply program is comprised of two phases: an ASR onsite phase and an ASR offsite phase. The onsite began production in August 2008, with production of 383 af in 2008. Total production during 2009 was 5,934 af.

The offsite phase is anticipated to be completed by July 2010. While this additional phase will reduce the effects of this naturally occurring movement of water and provide increased operational flexibility of recovering the stored water, no additional production capacity accompanies the offsite phase.

Other Potential Water Supply Projects

The System periodically receives unsolicited proposals for new water supply projects. Recent proposals have included large groundwater projects in Val Verde, Kinney, and Uvalde Counties to the west of San Antonio, Comal County north of San Antonio, and Brazos, Burleson, Lee, Leon, Milam, and Robertson Counties northeast of San Antonio. Each of these projects would include a requirement for construction of both production facilities and transmission infrastructure. Each project would have to be undertaken within the regulatory constraints of local

A-25 groundwater conservation district rules. The proposals generally vary in terms of ownership, permitting, construction, financing and operational responsibilities.

The 2009 Water Management Plan calls for a request for qualifications (“RFQ”) solicitation to occur in early 2010 to provide an opportunity for these and other potential water providers to present the characteristics of their projects in a common form for SAWS’ consideration. The RFQ response will allow SAWS to identify projects that can help meet mid- to long-term water needs.

Ocean Desalination

In 2009, the Water Management Plan includes the development of an ocean desalination project as one of the options to meet SAWS’ long-term water needs of 75,600 af. Beginning in 2009, the feasibility study will be initiated to identify potential sites, pipeline routes, permitting requirements, construction challenges, and partnership opportunities. Communications and outreach activities were undertaken in 2009 and will continue through 2010 prior to and after an RFQ is issued to select a consultant to begin a feasibility/conceptual study regarding siting of a desalination facility. Partnering opportunities will be explored during the outreach phase and will continue to be explored in the future. Ocean desalination appears to be the most expensive source of new water resources. The study will provide some certainty to cost estimates for informed consideration in the future.

Water Reuse Program

SAWS owns the treated effluent from its wastewater treatment plants and has the authority to contract to acquire and to sell non-potable water inside and outside SAWS’ water and wastewater service area. SAWS has developed a water reuse program utilizing the wastewater stream. Currently, approximately 23,000 af are under contractual commitment and 12,600 af are online. SAWS delivers up to 35,000 af per year of reuse water for non- potable water uses including golf courses and industrial uses that are currently being supplied from the Edwards Aquifer. This represents approximately 20% of SAWS’ current usage. Reuse water is delivered for industrial processes, cooling towers, and irrigation, which would otherwise rely on potable quality water. Combined with the 45,000–50,000 af per year used by CPS, this is the largest reuse water project in the country. SAWS has a contract with CPS through 2030 for the provision of such reused water. The revenues derived from the CPS contract have been excluded from the calculation of gross revenues, and are not included in any transfers to the City.

Integration Pipeline

The 2009 Water Management Plan addresses the operating challenge of co-locating the Brackish Groundwater Project, Regional Carrizo outlet, Local Carrizo and Aquifer Storage and Recovery Projects at a single site (Twin Oaks in Southern Bexar County) by expediting the Integration Pipeline Project. It will bring water to the Western part of the City to match the System’s current capability to bring water to the Eastern part of the City. The Project is scheduled for completion by 2014.

Conservation

Beginning in 1994, SAWS progressively implemented aggressive water conservation programs, which have reduced total per capita water production and use by 43.2%, going from 213 gallons-per–capita-per day (“gpcd”) in 1994 to approximately 121 gpcd in 2004. Given these accomplishments, the 2005 Update to SAWS’ fifty-year Water Resource Plan set a new goal for conservation that includes the provision to reduce per capita consumption to 116 gpcd during normal-year conditions and 122 gpcd during dry-year conditions by 2016. As SAWS has experienced three more dry years (2005, 2006, and 2008) and one more wet year (2007) since the adoption of these goals, an evaluation of these per capita usage goals for both normal and dry-year conditions is being preformed as part of the Water Supply Task Force review of SAWS’ Water Resource Plan. The goal for normal conditions remains 116 gpcd by 2016, with 126 gpcd in dry years and 106 gpcd in wet years.

In 2006, these efforts earned SAWS the 2006 City Water Conservation Achievement Award. This award, sponsored by the U.S. Conference of Mayors, recognizes a city’s ability to significantly reduce water use. In 2007, SAWS’ conservation activities were recognized by Harvard University and the Ford Foundation as one of 18 finalists for the 2007 Innovations in American Government Awards.

A-26 Indoor Residential Conservation

Indoor residential conservation programs encourage customers to save water inside their homes. A variety of education and rebate incentive programs assist ratepayers in achieving conservation. Customers learn about these programs through SAWS’ website, public events, direct mail inserts in bills, paid advertisements, and educational materials in popular local periodicals. SAWS’ most effective programs for indoor water use reduction include:

“Toilet Retrofits,” which involve the distribution of high-efficiency toilets, provide a substantial water savings for San Antonio. SAWS sponsors activities like the “Season to Save Community Challenge,” which tests the idea that non-profit organizations are effective at motivating ratepayers to participate in resource management programs. In 2007, the System distributed 27,000 high-efficiency toilets (HET)/low flow toilets (LFT), in 2008, 25,000 HET/LFT were distributed and in 2009, 19,000 HET/LFT were distributed.

“Plumbers to People” provides leak repairs and retrofits to qualified low-income homeowner customers. SAWS, in cooperation with the City’s Department of Community Initiatives - Center for Working Families, qualifies applicants based on the current Federal Assistance Guidelines. Only leaks that result in a loss of potable water are eligible for repair under the program. Water Conservation is achieved by quickly repairing leaks that would otherwise continue due to the cost of repairs. Analysis of program costs and water savings indicate that this affordability program is also one of our most effective at conserving water at a reasonable cost per unit.

Outdoor Residential Conservation

Residential outdoor programs address landscape and irrigation practices of homeowners. Outdoor use can account for up to 50% of total residential water use in the summers and average 20% of the water used annually. Education programs help ratepayers understand how following best practices can save water and money. Among SAWS’ most effective programs for outdoor water use reduction:

“Irrigation Check-Ups” provide SAWS’ ratepayers with a free analysis of their in-ground irrigation system. Trained conservation technicians visit homes to review each component of irrigation systems to determine maintenance needs to make suggestions for improving efficiency. Customers are invited to participate in the review process to get the maximum benefit from the site visit. A report that outlines any necessary maintenance repairs, suggestions for design improvements and how much water the system uses is provided to customers. The consultation visit includes suggestions on rebate incentive amounts available for making suggested design improvements. These check-ups result in an average 9% drop in consumption for residential customers.

“WaterSaver E-Newsletter” is a free information service provided to customers who want expert advice on how to take care of their Texas landscape. It includes timely lawn irrigation advice that is based on current weather conditions. Local horticulture experts provide weekly articles on seasonal landscape care. Plants that thrive in San Antonio are featured. A gardening expert responds to regularly submitted questions. In addition, gardening related events are highlighted in an events calendar. This weekly communication is currently going to 8,000 customers. Master Gardener volunteers help to promote the free service and subscriptions are regularly growing.

Commercial and Industrial Programs

SAWS has been working closely with commercial customers to help them conserve water for several years. In 1998, the commercial and industrial programs were expanded to include the toilet retrofit rebates previously offered only to residential customers. Water audits and case-by-case rebates for large-scale retrofits are also available. Since 1996, car wash businesses that meet certain conservation criteria are certified and provided a sign to be posted on their place of business. Every year SAWS presents the WaterSaver Awards to recognize businesses, organizations, and/or individuals that voluntarily initiated water conservation practices. Among SAWS’ most effective programs for commercial and industrial water use reduction:

A-27 “Commercial Retrofit Program” allows businesses with older, high-flow toilets to replace them by receiving free fixtures from SAWS. The facility needing a retrofit is analyzed to determine which fixtures should be changed and what new product will best meet the needs of the site. Fixtures targeted for change include toilet, showerheads, faucet aerators, urinals, ice machines and restaurant spray valves. Plumbing services to install the fixtures may be provided by SAWS if it is determined that the amount of water saved is high enough to offset the additional expense. Four-star hotels around San Antonio have completed these retrofits and had high customer ratings for their quality. The water consumption at hotels that are retrofitted reduces by 20% or more after retrofits are complete.

“Restaurant Certification Program” is the result of SAWS’ working with the San Antonio Restaurant Association. Participating restaurants receive replacement spray valves for their kitchen, have older toilets replaced, and learn about other ways they can reduce their water bills. The program has been very popular with restaurants. To date, 1,268 restaurants have been certified, with the replacement of 2,322 high-flow pre-rinse spray valves and 726 high-flow toilets. Total water savings associated with this program equates to 610 af per year. A list of the Certified WaterSavers Restaurants is available on SAWS’ website.

“Large-scale Retrofits Program” allows large-scale water users to apply on a case-by-case basis for a rebate for installation of water conserving equipment. The rebate may be for up to one-half of the cost of the retrofit, depending on the amount of water to be saved and other factors. The program requires a pre-audit, a pre-inspection, and ongoing verification of water savings. Examples of retrofit projects are diverse and include reclaim of air conditioning condensate, a change in process water usage, or retrofit to a non-water use technology.

“Cooling Tower Audits” help businesses manage their cooling towers as efficiently as possible. This program provides free audits of all cooling towers within SAWS’ service area. A cooling tower audit provides the customer with a detailed engineering report on their specific operation, as well as recommendations for achieving water and energy savings through increased cycles of concentration, capture of blowdown water for reuse in other applications, or installation of other water-conserving equipment.

Water Quality

SAWS’ Resource Protection and Compliance Department is responsible for protecting the quality of the Edwards Aquifer and conducting technical evaluations of how to increase its yield. The TCEQ has adopted rules relating to the activities of landowners in the recharge and drainage zones of the Edwards Aquifer. The City has adopted ordinances applicable within its City limits that limit or regulate activities, which could be harmful to water quality and has, through its Unified Development Code, regulated certain development within the City’s ETJ (five miles from city limits).

Research on the Edwards Aquifer is conducted as part of the Edwards Aquifer Optimization program. This is a comprehensive program that identifies and evaluates technical options to increase available yield from the Edwards Aquifer and to attempt to use the aquifer’s storage capacity more efficiently. In 2007, SAWS continued its investigative studies concerning the freshwater/saline-water interface of the Edwards Aquifer. The goal of these studies is to gain a better understanding of the hydrogeologic framework, chemical and hydraulic characteristics, and ground water flowpaths of the freshwater-saline water interface of the Edwards Aquifer. The USGS study of the San Marcos springs hydrogeology and water balance is currently in Year 3 of a 4 Year Study. The San Marcos Springs Recharge – Investigative Study effort encompasses scientific investigative work to refine the hydrogeologic setting, determine the hydraulic properties and groundwater flow gradient, and perhaps define local sources and flowpaths providing flow from San Marcos Springs. This study would provide data for evaluation of the local versus regional sourcing of springflow, the effectiveness of current management strategies, and the need for revised management policies to maintain San Marcos Spring flow. The data collection phase of the study is winding down, with the final report due to SAWS by December 31, 2011.

A-28 Water Supply Fee

In October 2000, the City Council created a permanent funding mechanism (the “Water Supply Fee”) to be used for water supply development and water quality projection. The Water Supply Fee is assessed on all potable water service for water usage in every instance of service for each month or fraction thereof. Effective January 13, 2009, the per 100-gallon fee was increased to $0.1529. On June 17, 2010, City Council approved a change to the rate structure and rates charged for the Water Supply Fee to be effective on or about November 1, 2010. For detailed information on the current rates charged by SAWS, see www.saws.org/service/rates.

Capital Improvement Plan

The following is a proposed five-year Capital Improvement Program for SAWS. It is the intention of SAWS to fund the program with tax-exempt commercial paper, impact fees, system revenues, and future bond issues. SAWS budgeted the following capital improvement projects during calendar year 2010:

 $8.7 million for the wastewater treatment program to repair, replace, or upgrade treatment facilities;  $65.4 million for the wastewater collection program to fix deteriorated components of the collection system, and provide capacity for future growth;  $20.3 million to replace sewer and water mains;  $54.5 million for the governmental replacement and relocation program;  $27.8 million to construct new and fix deteriorated components of the production facilities;  $9.0 million for the water distribution program to fix deteriorated components of the distribution system, and provide capacity for future growth; and  $99.9 million for water supply development, water treatment, and water transmission projects for new sources of water.

SAWS anticipates the following capital improvement projects for the five fiscal years listed:

Fiscal Year 2010 2011 2012 2013 2014 Total Water Supply $ 100,971,787 $ 102,011,490 $ 95,804,426 $ 165,378,445 $ 92,048,300 $ 556,214,448 Water Delivery 78,137,301 58,912,200 47,161,726 55,047,848 52,829,779 292,088,854 Wastewater 118,507,888 147,826,262 143,976,992 113,842,621 135,798,806 659,952,569 Heating and Cooling 100,000 250,000 100,000 1,600,000 100,000 2,150,000 Total $ 297,716,976 $ 308,999,952 $ 287,043,144 $ 335,868,914 $ 280,776,885 $ 1,510,405,871 ______Source: SAWS.

The following table was prepared by SAWS staff based upon information and assumptions it deems reasonable, and shows the projected financing sources to meet the projected capital needs.

Fiscal Year 2010 2011 2012 2013 2014 Total Revenues $ 19,171,463 $ 78,801,738 $ 31,840,901 $ 39,409,741 $ 64,071,559 $ 233,295,402 Impact Fees 42,131,297 30,000,000 32,000,000 34,000,000 34,000,000 172,131,297 Debt Proceeds 236,414,216 200,198,214 223,202,243 262,459,173 182,705,326 1,104,979,172 Total $ 297,716,976 $ 308,999,952 $ 287,043,144 $ 335,868,914 $ 280,776,885 $ 1,510,405,871 ______Source: SAWS.

A-29 San Antonio Water System Summary of Pledged Revenues for Debt Coverage (1) ($000)

Maximum Annual Revenue Bond Debt Service(b) Debt Service Requirements Net Senior Gross Operating Revenue Total Lien Year Revenues(c) Expenses(d) Available Principal Interest Total Coverage Debt(c) Coverage Debt(e) Coverage(f) 2009 $370,464 $219,523 $150,941 $34,900 $75,398 $110,298 1.37 $123,182 1.23 $103,205 1.46 2008 387,516 208,774 178,742 27,360 69,860 97,220 1.84 98,840 1.81 86,140 2.08 2007 347,391 188,180 159,211 24,880 67,785 92,665 1.72 102,880 1.55 86,138 1.85 2006 374,831 179,903 194,928 22,415 62,947 85,362 2.28 91,175 2.14 78,373 2.49 2005 332,669 173,490 159,179 16,505 54,987 71,492 2.23 94,992 1.68 78,373 2.03 2004 264,782 153,860 110,922 7,735 52,205 59,940 1.85 84,941 1.31 67,203 1.65 2003 242,488 152,743 89,745 5,515 44,614 50,129 1.79 76,075 1.18 61,511 1.46 2002 240,375 134,977 105,398 25,045 39,589 64,634 1.63 66,268 1.59 61,511 1.71 2001(a) 136,235 78,448 57,787 0 20,345 20,345 n/a n/a n/a 2001 207,225 121,351 85,874 23,760 36,661 60,421 1.42 66,994 1.28 56,293 1.53 ______(1) Unaudited. (a) Seven months ended December 31, 2001. In 2001, the SAWS Board of Trustees approved a change in the fiscal year end from May 31st to December 31st. (b) Represents current year debt service payments. Details regarding outstanding debt can be found in the notes to the financial statements. All bonded debt is secured by revenue and is included in these totals. (c) Gross Revenues are defined as operating revenues plus nonoperating revenues less revenues from the City Public Service contract and interest on Project Funds. (d) Operating Expenses reflect operating expenses before depreciation as shown on the Statement of Revenues, Expenses, and Changes in Equity. (e) Maximum annual debt service requirements consist of principal and interest payments prior to the U.S. federal interest subsidy on the Series 2009A revenue bonds. (f) SAWS bond ordinance requires the maintenance of a debt coverage ratio of at least 1.25x the annual debt service on outstanding senior lien debt. n/a Not applicable due to short period. Source: SAWS.

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A-30 The Airport System

General

The City’s airport system consists of the San Antonio International Airport (the “International Airport” or the “Airport”) and Stinson Municipal Airport (“Stinson”) (the International Airport and Stinson, collectively, the “Airport System”), both of which are owned by the City and operated by its Department of Aviation (the “Department”).

The International Airport, located on a 2,600-acre site that is adjacent to Loop 410 freeway and U.S. Highway 281, is eight miles north of the City’s downtown business district. The International Airport consists of three runways with the main runway measuring 8,502 feet and able to accommodate the largest commercial passenger aircraft. Its two terminal buildings contain 24 second-level gates. Presently, the following domestic air carriers provide service to San Antonio: AirTran, American, American Eagle, Chautauqua, Continental, Continental Express, Delta, Delta Connection/ASA, Delta Connection/Comair Compass, Delta Connection/Masaba, Frontier, Mesa, Southwest, United, United Express/Skywest, United Express/GoJet, United Express/Shuttle America, and US Airways. Aero Mexico Connect, Aeromar, and Mexicana are Mexican airlines that provide passenger service to Mexico.

In May 2009, work began on a new Master Plan for the International Airport. The Master Plan will guide future development through 2030 and beyond. The Master Plan is scheduled for acceptance by the Federal Aviation Administration (“FAA”) in early 2011. The Master Plan will guide Airport development for the 5, 10, and 20-year future.

The International Airport is considered a medium hub facility by the FAA. For the calendar year ended December 31, 2009, the International Airport enplaned 3,905,439 passengers. Airport management has determined that of the Airport’s passenger traffic, 92% is origination and destination in nature (which is important because it demonstrates strong travel to and from the City, independent from any single airline’s hubbing strategies).

Stinson Municipal Airport, located on approximately 375 acres, is approximately 6 miles south of the City’s downtown business district. Stinson was established in 1915 and is one of the country’s first municipally owned airports. It is the second oldest continuously operating general aviation airport in the U.S. and serves as the general aviation reliever to San Antonio International Airport. An Airport Master Plan for Stinson was initiated in March 2001 to facilitate the development of Stinson and to expand its role as a general aviation reliever to the International Airport. The Texas Department of Transportation (“TxDOT”) accepted the Master Plan in 2002 and has recommended $16.0 million in grant funding for capital improvements over the 15-year future. The expansion of Stinson’s facilities is also needed to take advantage of new, complementary business opportunities evolving with the synergy between Brooks City-Base, Port San Antonio, and Stinson. A Target Industry Study was completed in 2003 as part of the master planning process. The study helped facilitate development of Stinson properties through the identification of industries and businesses considered compatible for locating at Stinson.

Capital Improvement Plan

In FY 2002, the City commenced implementation of a ten-year Capital Improvement Plan (the “CIP”). The FY 2010 through FY 2015 CIP began in 2006. Included in the program are projects planned or currently under construction at the Airport and Stinson. The six-year program totals $287 million. The projects are necessary to accommodate the expected growth in the aircraft and passenger activity at the Airport and to replace or rehabilitate certain facilities and equipment at the Airport and Stinson. The CIP addresses terminal and airfield improvements, including the addition of Terminal B and the removal of the existing Terminal 2, as well as roadway improvements, airfield improvements, residential acoustical treatment and other building and drainage improvements.

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A-31 The anticipated sources of funding for the Airport’s CIP for fiscal years 2010 through 2015 are as follows:

Funding Sources Anticipated Funding ($000) Grants AIP Grants $107,162 Texas State Grants 3,260 Passenger Facility Charges (“PFC”) Pay-As-You-Go 26,883 PFC Secured Bonds 55,135 Other Funding General Airport Revenue Bonds 58,778 Airport Capital Funds 36,330 Total $287,548

The CIP included capital improvements, which are generally described as follows:

Improvement Amount ($000) International Airport Terminal/Gate Expansion $100,796 Airfield Improvements 51,952 Apron 27,254 Acoustical Treatment 61,250 Other Projects 41,834 Stinson Airport 4,462 Total $287,548

Please note that the City issued $34.5 million of Tax Notes, Series 2010 (the “Notes”) for the interim financing of the CIP. The City plans to refund these Notes in the Fall of 2010 when the City issues Airport bonds.

PFC Projects. In the United States, the federal Passenger Facility Charge (“PFC”) Program allows the collection of PFC fees up to $4.50 for every enplaned passenger at commercial airports controlled by public agencies. Airports use these fees to fund FAA-approved projects that enhance safety, security, or capacity; reduce noise; or increase air carrier competition. Federal law limits use of PFC funds strictly to the above categories. Public agencies wishing to impose passenger facility charges are required to apply to the FAA for such authority and must meet certain requirements and implementing regulations issued by the FAA.

The FAA issued a “Record of Decision” on August 29, 2001 approving the City’s initial PFC application. The City, as the owner and operator of the Airport, received authority to impose a $3.00 PFC and to collect, taken together, approximately $102,500,000 in PFC revenues. On February 15, 2005, the FAA approved an application amendment increasing the PFC funding by a net amount of $13,893,537. On February 22, 2005, the FAA approved the City’s application for an additional $50,682,244 in PFC collections to be used for eleven new projects. On June 26, 2007, the FAA approved two amendments to approved applications increasing the PFC funding by a net amount of $121,611,491 for two projects and $67,621,461 for four projects. On October 4, 2007, the FAA issued a “Final Agency Decision” for a PFC application to be used for four new projects and increased the impose authority by an additional $24,625,453. Additionally, the FAA approved the increased collection rate from $3.00 to $4.50 effective October 1, 2007.

On October 1, 2007, the City began collecting a $4.50 PFC (less than $0.11 air carrier collection charge) per paying passenger enplaned. A total of approximately $381 million in PFC revenues will be required to provide funding for the projects included in the Airport’s CIP. The City has received PFC “impose and use” authority, meaning that it may impose the PFC and use the resultant PFC revenues for all projects, contemplated to be completed using bond proceeds. The estimated PFC collection expiration date is March 1, 2019.

A-32 To date, the following projects have been approved as “impose and use” projects:

 Replace Remain Overnight Apron  Rehabilitate Terminals 1 & 2  Reconstruct Perimeter Road  Construct New Concourse B  Acoustical Treatment Program  Construct Elevated Terminal Roadway  Upgrade Central Utility Plant  Construct Apron – Terminal Expansion  Install Utilities – Terminal Expansion  Replace Two Airport Fire & Rescue Vehicles  Conduct Environmental Impact Statement  Reconstruct Terminal Area Roadway  Install Noise Monitoring Equipment  Install Terminal and Airfield Security Improvements  Install Airfield Electrical Improvements  PFC Development and Administration Costs  Terminal 1 Modifications  RSAT Airfield Improvements  Runway 3-21 Extension  Extend Taxiway R

Airport management has amended its PFC funding authorization to increase the amount of PFC funding that may be used in the current capital program. The Airport management has coordinated PFC Program amendments with the airlines, the FAA, and the public, which will increase the authorization by $192,810,480. This will increase the overall PFC authorization to collect from $380,958,549 to $573,769,029. FAA approval of the amendments was received on May 28, 2010.

Projects that will be funded with the additional PFC proceeds include Noise Attenuation, Construction of Terminal B, New Utilities Plant Expansion, Terminal 1 Modifications, and Taxiway R Extension.

Terminal Expansion. The terminal expansion project will include an eight-gate Terminal B, a new consolidated baggage handling system and a new central utility plant. Terminal B will replace Terminal 2, which is obsolete and will be demolished. Terminal B is schedule for completion in November 2010.

Airfield Improvements. Implementation of the Master Plan Airfield Recommendations required an Environmental Impact Statement (“EIS”) to assess the environmental impacts associated with the capacity enhancing runway/taxiway projects. Public involvement throughout the process is essential to the successful completion of these projects. Airport Master Plan projects included as part of the EIS include extension of Runway 3/21 and Taxiways N and Q; reconstruction and upgrade of Runway 12L/30R and associated taxiways from general aviation to air carrier dimensions of approximately 8,500 feet by 150 feet; as well as the installation of an instrument landing system. With a determination from the FAA that the Runway 12L/30R project was not yet critical to airfield capacity and that the required length of extension for Runway 3/21 was 1,000 feet rather than 1,500 feet proposed by the Master Plan, the EIS was reclassified as an environmental assessment (“EA”) for the remaining work. The final public meeting for the EA was held on August 28, 2007 and a finding of no significant impact was received. In 2008, Taxiway’s G and N were widened and airfield lighting was enhanced as part of the ongoing apron improvements. The extension of runway 3/21 is being funded with incremental Airport Improvement Program Grants and therefore will be constructed in phases as grant funds become available. The extension project began in 2009 and is expected to be completed in late 2012.

Parking Improvements. As of Fall 2009, the International Airport operates and maintains approximately 8,668 public parking spaces and 1,263 employee parking spaces for a total of 9,931 parking spaces. In June 2008, a 2,400 parking space expansion was completed. With completion of the expansion, parking facilities are expected to accommodate demand through 2020.

A-33 Cargo Improvements. The International Airport has two designated cargo areas: the West Cargo Area, which was constructed in 1974 and refurbished in 1990, and the East Cargo Area, which was completed in 1992 and expanded in 2003. The East Cargo Area is specifically designed for use by all-cargo, overnight-express carriers. Custom-built cargo facilities in the East Cargo Area are leased to DHL, UPS, and Federal Express, while Lynx constructed a processing facility in the year 2000. Foreign trade zones exist at both cargo areas. Enplaned and deplaned cargo for 2009 totaled 259,814,742 pounds.

Airport Operations

The City is responsible for the issuance of revenue bonds for the Airport System and preparation of long- term financial feasibility studies for Airport System development. The Department exercises direct supervision of airport operations. The Department is responsible for: (i) managing, operating, and developing the International Airport, Stinson, and any other airfields that the City may control in the future; (ii) negotiating leases, agreements, and contracts; (iii) computing and supervising the collection of revenues generated by the Airport System under its management; and (iv) coordinating aviation activities under the FAA.

The FAA has regulatory authority over navigational aid equipment, air traffic control, and operating standards at both the International Airport and Stinson.

The passage of the Aviation and Transportation Security Act in November of 2001, created the Transportation Security Administration (“TSA”). The Department has worked closely with the TSA to forge a higher level of security for the traveling public. TSA employs about 300 individuals at the International Airport to meet the federal security requirements.

The number of based aircraft and volume of aircraft operations at Stinson Airport has been relatively constant over the past few years. Material growth in aircraft operations and number of base aircraft is expected to increase over the next few years as additional common use hangars and T-hangars are constructed and come online.

Because of its potential growth, the TxDOT Aviation Division approved grant funds for various projects at Stinson. To accommodate the demand for services at Stinson, a $4.8 million terminal expansion project added approximately 24,000 square feet of additional concession, administrative, education, and corporate aviation space to the existing 7,000 square-foot terminal building. With Airport System funds, the Stinson Terminal Building was completed in November 2008. The terminal expansion project adds administrative offices, classrooms, concession, retail space, and conference rooms to accommodate and attract new business. In November 2007, the Environmental Assessment for the runway extension and related airfield projects were approved when the TxDOT Aviation Division issued a “Finding of No Significant Impact.” The runway project completed in March 2010 provides a usable runway length of 5,000 feet. The additional runway length will allow Stinson to serve additional types of general aviation aircraft to include operators of corporate jets. The expansion, along with a runway extension and other infrastructure improvements, will allow for the growth of existing tenants as well as create opportunities for new business to locate at Stinson. Palo Alto Community College moved its Aviation Program to Stinson in the expanded terminal space in June 2009.

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A-34 Comparative Statement of Gross Revenues and Expenses - San Antonio Airport System

The historical financial performance of the Airport System is shown below for the last five fiscal years:

Fiscal Year Ended September 30 2005 2006 2007 2008 2009 Gross Revenues1:$47,180,690 $52,785,593 $56,682,447 $65,187,888 $61,248,835 Airline Rental Credit 5,322,516 7,988,304 8,831,771 5,040,274 4,429,593 Adjusted Gross Revenues $52,503,206 $60,773,897 $65,514,218 $70,228,162 $65,678,428 Expenses (26,411,104) (29,471,313) (32,583,693) (41,585,794) (40,476,525) Net Income $26,092,102 $31,302,584 $32,930,525 $28,642,368 $25,201,903 ______1 As reported in the City’s audited financial statements. Source: City of San Antonio, Department of Finance.

Total Domestic and International Enplaned Passengers - San Antonio International Airport

The total domestic and international enplaned passengers on a calendar year basis, along with year-to-year percentage change are shown below:

Calendar Increase/ Percent (%) Year Total (Decrease) Change 2000 3,647,094 ------2001 3,444,875 (202,219) (5.54) 2002 3,349,283 (95,592) (2.78) 2003 3,250,911 (98,372) (2.94) 2004 3,498,895 247,984 7.63 2005 3,713,792 214,897 6.14 2006 4,003,075 289,283 7.79 2007 4,030,571 27,496 0.69 2008 4,167,440 136,869 3.40 2009* 3,905,439 (262,001) (6.29) ______* The decline in enplaned passengers is attributable to general economic conditions and two airlines failing. Source: City of San Antonio, Department of Aviation.

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A-35 Total Enplaned and Deplaned International Passengers - San Antonio International Airport

The total enplaned and deplaned for international passengers on a calendar year basis, along with year-to- year percentage change are shown below:

Calendar Increase/ Percent (%) Year Total (Decrease) Change 2000 243,525 ------2001 219,352 (24,173) (9.93) 2002 201,274 (18,078) (8.24) 2003 159,576 (41,698) (20.72) 2004 191,254 31,678 19.85 2005 185,992 (5,262) (2.75) 2006 199,138 13,146 7.07 2007 197,585 (1,553) (0.78) 2008 177,219 (20,366) (10.31) 2009 139,286 (37,933) (21.40) ______Source: City of San Antonio, Department of Aviation.

Air Carrier Landed Weight - San Antonio International Airport

The historical aircraft landed weight in 1,000-pound units on a calendar year basis is shown below. Landed weight is utilized in the computation of the Airport’s landed fee.

Calendar Increase/ Percent (%) Year Total (Decrease) Change 2000 5,838,185 ------2001 5,546,561 (291,624) (5.00) 2002 5,559,018 12,457 0.23 2003 5,391,301 (167,717) (3.02) 2004 5,416,555 25,254 0.47 2005 5,650,228 233,673 4.32 2006 5,946,232 296,004 5.24 2007 6,098,276 152,044 2.56 2008 6,209,192 110,916 1.82 2009 5,487,537 (721,655) (11.62) ______Source: City of San Antonio, Department of Aviation.

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A-36 APPENDIX B 

  CITY PUBLIC SERVICE            

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 20102009 2008      85.5% 81.2% 86.9% 12.9%  10.8% 11.3%   3.2% 5.9%  2.3%   Electric Gas Nonoperating 

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T  VX ,#0%7 TRSR,,3 *#.-02 

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FINANCIALPOSITION  BalanceSheetsSummary '-** 01',2&-31 ,"1   2 ,3 07USQ & ,%# 2010 TRR[ TRRZ TRSR41TTRR[ TRR[41TTRRZ  11#21  300#,2 11#21 $ 866,159 $ SQRXVQ[TS $ SQS[[QSTZ $ S[ZQYXT VSZTY$ $ SUVQTRY VSSTT$  7-,!300#,2 11#21  #120'!2#" 11#21 821,794 YT[QWRV  SQTWTQWWY  [TQT[R STTY$ WTUQRWU VVSTZ$ ;2�,-,!300#,2 11#21 WSTQT[T  WTVQ[WY  TQRXS VRTV$ STQXXW VTTV$  510,231  .'2 * 11#21Q,#2 7,064,193 XQVR[QZV[  WQZRWQWUS  XWVQUVV SRTT$ XRVQUSZ SRTV$  "-2 * 11#21 $ 9,262,377 $ ZQYSXQWXX $ ZQYZTQSYU $ WVWQZSS XTU$ $ XWQXRY VRTY$ <' '*'2'#1  300#,2*' '*'2'#1 $ 646,506 $ZRUQ[ZZ $ [Z[QXSY $ SWYQVZT VS[TX$ $ SZWQXT[ VSZTZ$  <-,%V2#0+"# 2Q,#2 4,407,284 UQZVVQSTS  UQXZ[QYVX  WXUQSXU SVTX$ SWVQUYW VTT$ ;2�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urrentAssets  FY 2010300#,2 11#21 2 2 ,3 07 USQ TRSRQ -$ $ZXXTT +'**'-, 5#0# $S[ZTZ +'**'-, *-5#0 2& , 2&# * ,!# 22 ,3 07USQTRR[T"&#.0'+ 07!-,20' 32-015#0# "#!0# 1#-$$SYZTS+'**'-,',1#!30'2'#1 *#,"',% ! 1& !-** 2#0 * "3# .0'+ 0'*7 2-  !& ,%# ', 2&# +'6 #25##, 1#!30'2'#1 !-** 2#0 * ," ! 1& !-** 2#0 *R ,$ZWTU+'**'-,"#!0# 1#',.0#. 7+#,21.0'+ 0'*7 220' 32 *#2-*-5#0.0#. '"$3#*+ 0%', ,"$3#*&#"%#1R $WTY+'**'-,"#!0# 1#',',2#0#12 ,"-2�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oncurrentRestrictedAssets  FY 2010#120'!2#" ,-,!300#,2 11#21 2-2 *#" $ZTSTZ +'**'-, 1 -$ 2 ,3 07 USQ TRSRQ , ',!0# 1# -$ $[TTU+'**'-,!-+. 0#"2-2 ,3 07USQTRR[T"&#',!0# 1#5 1.0'+ 0'*7 220' 32 *#2- ,',!0# 1#', 2&# '#!-++'11'-,',% "03121 -$ $XZTW +'**'-, "3# 2- &'%� ',4#12+#,2 # 0,',%1 ," , ',!0# 1# -$ $UZTV+'**'-, ', 2&# -," -,1203!2'-, 3,"T  "&# ',!0# 1# 5 1 . 02' **7 -$$1#2 7  "#!0# 1# -$ $YTX+'**'-,',2&#0' 3," ," "#!0# 1#-$$ZTV+'**'-,',2&##. '0 ,"#.* !#+#,2!!-3,2T 

## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T  VSR ,#0%7 TRSR,,3 *#.-02 

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## !!-+. ,7',%',"#.#,"#,2 3"'2-01_0#.-02T  VSS ,#0%7 TRSR,,3 *#.-02

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  VYU ,#0%7 TRSR,,3 *#.-02  GLOSSARYOFTERMS AdvanceRefunding: -,"'113 ,!#',5&'!& CapitalAsset:, 11#25'2& *'$#-$+-0#2& , ,#5 -,"1 0#1-*" 2 *-5#0',2#0#120 2#2& , -,# 7# 0 2& 2 '1 ,-2 -3%&2 ," 1-*" ', 2&# -3212 ,"',% -,#1T  "&# .0-!##"1 0# 2&#, -0"', 07!-301#-$ 31',#11T ',4#12#" ', , '00#4-! *# #1!0-5R 5&#, 2&#  -*"#0 -,"1 #!-+# ! ** *#Q 2 0# . '" -$$ Cash and Cash Equivalents: "&# 4 *3# -$ 5'2&2&#',4#12#".0-!##"1T 11#21 2& 2 ! , # !-,4#02#" ',2- ! 1&  '++#"' 2#*7T  @13 **7 ',!*3"#1 ,) !!-3,21 Allowance for Funds Used During ,"+ 0)#2 *#1#!30'2'#1Q13!& 1%-4#0,+#,2 Construction (“AFUDC”):  !-12 !!-3,2',% -,"1T 1&#/3'4 *#,21-,2&# * ,!#&##21 .0-!#"30# 5�# 7 ',2#0#12Q !& 0%#1 -, ',!*3"# 1#!30'2'#1 5'2& , -0'%', * + 230'27 -$ -00-5#" $3,"1 ,"  0#230, -, #/3'27 $-0 [R" 71-0*#11T ! .'2 * 31#" 2- $', ,!# !-,1203!2'-, 0# ""#" 2-2&#!-12-$32'*'27.* ,2 #',%!-,1203!2#"'T#TQ Community Infrastructure and Economic ! .'2 *'8#"',2#0#12T Development (“CIED”) Fund: 3,"1 31#" 2-  13..-02 /3 *'$'#" ! .'2 * .0-(#!21 2& 2 .0-4'"# Amortize:"-0#"3!# ,-0'%', * +-3,2-0 , #!-,-+'! #,#$'2 5'2&', 2&# !-++3,'2'#1 !!-3,2 * ,!#-, ,',12 **+#,2 1'1T 1#04#" 7,#0%7T   Annual Other Postemployment Benefit ComponentUnit:*#% **71#. 0 2##,2'27$-0 (“OPEB”) Cost: , !!03 *V 1'1 +# 130# -$ 5&'!& 2&# #*#!2#" -$$'!' *1 -$ 2&# .0'+ 07 2&#.#0'-"'!!-12-$ ,#+.*-7#0_1. 02'!'. 2'-, %-4#0,+#,2 0#$', ,!' **7 !!-3,2 *# ,"$-0 ', "#$',#" #,#$'2; .* ,T 5&'!& 2&# , 230# ," 1'%,'$'! ,!# -$ '21  0#* 2'-,1&'. 5'2& 2&# .0'+ 07 %-4#0,+#,2 0# Annual Pension Cost (“APC”):  +# 130# -$ 13!& 2& 2 #6!*31'-, 5-3*" ! 31# 2&# 0#.-02',% 2&#.#0'-"'!!-12-$ ,#+.*-7#01. 02'!'. 2'-, #,2'27_1$', ,!' *12 2#+#,212- #+'1*# "',%-0 ', "#$',#" #,#$'2.#,1'-,.* ,T ',!-+.*#2#T   AnnualRequiredContribution(“ARC”):"&# CoolingDegreeDay:"&#+# 130#-$&-5&'%& #+.*-7#0_1.#0'-"'!0#/3'0#"!-,20' 32'-,12-  2&# 4#0 %# " '*7 2#+.#0 230# '1 0#* 2'4# 2-  "#$',#" #,#$'2 ;  .* , -0 "#$',#" #,#$'2 0#$#0#,!# 2#+.#0 230# -$ YT "#%0##1 .#,1'-,.* ,Q! *!3* 2#"', !!-0" ,!#5'2&2&# &0#,&#'2T  -0 #6 +.*#Q '$ 2&# 4#0 %# . 0 +#2#01T 2#+.#0 230#$-02&#" 7'1YZ"#%0##1Q2&#,2&# !--*',%V"#%0##" 71 0##/3 *2-XT Assets: #1-30!#1-$ 4 *3#2-2&#!-+. ,72-  5&'!&'2& 1#6!*31'4#0'%&21-$31#T Decommissioning: "&# .0-!#11 0#* 2#" 2-  .#0+ ,#,2*7 2 )',%  ,3!*# 0 .* ,2 -32 -$ Balance Sheet:  12 2#+#,2 -$ $', ,!' * 1#04'!#Q ',!*3"',% "#!-,2 +', 2',% ," .-1'2'-, 1 -$  1.#!'$'! " 2#Q *'12',% 11#21Q 0#+-4',% 3'*"',%1-0-2�1203!230#1T *' '*'2'#1 ,"$3,",#2 11#21T   Defeasance:  .0-4'1'-, 2& 2 *#% **7 Build America Bonds (“BABs”):" 6 *# "'1!& 0%#1  -00-5#0 $-0 "# 2 ',!300#" 5&#, +3,'!'. * -,"1 !0# 2#" 3,"#0 2&# +#0'! , 2&# -00-5#01#21 1'"#! 1&-0 -,"113$$'!'#,2 #!-4#07 ," #',4#12+#,2 !2 -$ TRR[ 2& 2 2-1#04'!#2&#-3212 ,"',%"# 2T ! 007 1.#!' * $#"#0 * 13 1'"'#1 $-0 #'2� 2&#  -,"&-*"#0-02&# -,"'113#0T Depletion: "&# 1712#+ 2'! **-! 2'-, -$ 2&# !-12 -$  , 230 * 0#1-30!# $0-+ 2&# * ,!# Call: , -.2'-, !-,20 !2 %'4',% 2&# -5,#0 2&# 1&##22-2&#',!-+#12 2#+#,2T 0'%&2 32,-22&#- *'% 2'-,2- 37 1.#!'$'#" +-3,2 -$ , 3,"#0*7',% 11#2 2  1.#!'$'#" Depreciation: +-3,2 **-! 2#" "30',% 2&# .0'!#5'2&', 1.#!'$'#"2'+#T .#0'-"2-#6.#,1#2&#!-12-$ !/3'0',% ! .'2 *  11#2-4#02&#31#$3**'$#-$2&# 11#2T

 VYV ,#0%7 TRSR,,3 *#.-02  Derivative: 0, $', ,!#Q  1#!30'27 $-0 5&'!& Governmental Accounting Standards Board .0'!#'1"#.#,"#,23.-,-0"#0'4#"$0-+-,#-0 (“GASB”): "&# 32&-0'2 2'4# 12 ," 0"V1#22',% +-0#3,"#0*7',% 11#21T"&#"#0'4 2'4#'21#*$'1 -"7$-0 !!-3,2',% ,"$', ,!' *0#.-02',%$-0 +#0#*7 !-,20 !2 #25##,25--0+-0#. 02'#1T %-4#0,+#,2 *#,2'2'#1',2&#@,'2#"2 2#1T 6 +.*#1 -$ "#0'4 2'4#1 ',!*3"# $3230#1 ,"  -.2'-,1T HeatingDegreeDay:"&#+# 130#-$&-5*-5 2&# 4#0 %# " '*7 2#+.#0 230# '1 0#* 2'4# 2-  Electric Reliability Council of Texas 0#$#0#,!# 2#+.#0 230# -$ XW "#%0##1 (“ERCOT”):  , -0% ,'8 2'-, 5&-1# +'11'-, '1 &0#,&#'2T  -0 #6 +.*#Q '$ 2&# 4#0 %# 2- "'0#!2 ," #,130# 0#*' *# ," !-12V#$$#!2'4# 2#+.#0 230#$-02&#" 7'1XR"#%0##1Q2&#,2&# -.#0 2'-, -$ 2&# #*#!20'! 20 ,1+'11'-, %0'" ', &# 2',%V"#%0##" 71 0##/3 *2-WT "#6 1 ," 2- #, *# $ '0 ," #$$'!'#,2 + 0)#2V "0'4#, 1-*32'-,1 2- +##2 !312-+#01_ #*#!20'! Hedging:"&#.0-!#11-$ 37',% ,"1#**',%$3#* 1#04'!#,##"1T -'*R , 230 * % 1R ," #*#!20'! #,#0%7 $3230#1Q  -.2'-,1 -0 1'+'* 0 !-,20 !21 2- .0-2#!2 % ',12 Fair Value: "&# +-3,2 2 5&'!&  $', ,!' * *-11"3#2-.0'!#$*3!23 2'-,1T ',1203+#,2 !-3*" # #6!& ,%#" ',  !300#,2  20 ,1 !2'-, #25##,5'**',%. 02'#1Q-2�2& , Kilowatt(“kW”):+# 130#-$#*#!20'!.-5#0T ', $-0!#"-0*'/3'" 2'-,1 *#T  )'*-5 22 #/3 *1 SQRRR 5 221T  02 .0-"3!#1 #,-3%& #,#0%7 2- *'%&2 3. 2#, SRRV5 22 *'%&2 Federal Energy Regulatory Commission 3* 1T (“FERC”):0,"#.#,"#,2$#"#0 * %#,!7!0# 2#"  5'2&',2&#@TT'#. 02+#,2-$,#0%7T '1 Kilowatthour(“kWh”):+# 130#-$#*#!20'! 4#12#" 5'2& 0- " 0#%3* 2-07 32&-0'27 -4#0 .-5#0 !-,13+.2'-,T   )'*-5 22V&-30 #/3 *1 5&-*#1 *# #*#!20'!Q , 230 * % 1 ," -'* SQRRR 5 221 -$ #,#0%7 $*-5',% $-0  -,#V&-30 .0-"3!2'-,Q ," 2&# *'!#,1',% -$ &7"0-#*#!20'! .#0'-"T $ !'*'2'#1T  Lease:  *#% * %0##+#,2 2- . 7 0#,2 2- 2&# Financial Accounting Standards Board *#11-0 $-0  12 2#" .#0'-" -$ 2'+#T  -+#2'+#1 (“FASB”): - 0" !-+.-1#" -$ ',"#.#,"#,2 2&#*# 1#'1',13 12 ,!# .30!& 1#-$ , 11#2 +#+ #01 5&- !0# 2# ," ',2#0.0#2 %#,#0 **7 ,"  $', ,!',% 00 ,%#+#,2 'T#TQ  ! .'2 * !!#.2#" !!-3,2',%.0',!'.*#1b6cT *# 1#T   Fiscal Year (“FY”): "&# STV+-,2& .#0'-" Lease/Leaseback:$', ,!',%20 ,1 !2'-,2& 2 !-4#0#" 72&#',!-+#12 2#+#,2T$'1! *7# 0 ',4-*4#1 !-+. ,7*# 1',% , 11#22- ,-2� + 7-0+ 7,-2!-',!'"#5'2& ! *#," 07# 0T #,2'27 ,"2& 2#,2'2713 *# 1',%2&# 11#2 !) -0 ,#0%7Q 2&# $'1! * 7# 0 '1 $0-+ 2-2&#!-+. ,7T # 03 07S2&0-3%&2 ,3 07UST   Liabilities: * '+1 7 !0#"'2-01 % ',12 2&# Futures: ', ,!' * !-,20 !21 - *'% 2',% 2&# 11#21-$2&#!-+. ,7T 37#02-.30!& 1# , 11#2-02&#1#**#02-1#**  , 11#2Q 13!& 1  .&71'! * !-++-"'27 -0  MCF:  +# 130# -$ , 230 * % 1 4-*3+#1T  , $', ,!' *',1203+#,2Q 2 .0#"#2#0+',#"$3230# & #/3 *1SQRRR!3 '!$##2T " 2# ," .0'!#T  3230#1 !-,20 !21 "#2 '* 2&# /3 *'27 ," /3 ,2'27 -$ 2&# 3,"#0*7',% 11#2R MMBtu: SQRRRQRRR 0'2'1& "�+ * @,'21 2 0#12 ," 0"'8#"2-$ !'*'2 2#20 "',%-,  b "@cT   "@ '1 2&# 12 ," 0" 3,'2 $-0 $3230#1#6!& ,%#T +# 130',%2&#/3 ,2'27-$&# 2#,#0%7Q13!& 1  2&#&# 2!-,2#,2-$$3#*T02'12&# +-3,2-$&# 2 Generally Accepted Accounting Principles #,#0%7 ,#!#11 07 2- 0 '1# 2&# 2#+.#0 230# -$ (“GAAP”): -,4#,2'-,1Q 03*#1 ," .0-!#"30#1 -,# .-3," -$ 5 2#0 -,# "#%0## &0#,&#'2 2 2& 21#04# 12&#,-0+$-02&#$ '0.0#1#,2 2'-, 1# *#4#*.0#1130#T -$ $', ,!' * 12 2#+#,21T "&# 6-4#0,+#,2 *  !!-3,2',% 2 ," 0"1 - 0" '1 0#1.-,1' *# $-0  1#22',%6$-012 2# ,"*-! *%-4#0,+#,21T 

 VYW ,#0%7 TRSR,,3 *#.-02  Management’s Discussion & Analysis Net Revenue: #0 2&# 7#5 #0'#1 -," (“MD&A”):1#!2'-,-$2&# ,,3 *0#.-022& 2 ;0"', ,!#Q ** ',!-+# ," 0#4#,3#1 $0-+ 2&# !-,2 ',1 - (#!2'4# ," # 1'*7 0# " *# , *71'1 -.#0 2'-,-$2&#712#+1 $2#02&#"#"3!2'-,-$ $0-+ + , %#+#,2 -32 2&# !-+. ,7_1 + ',2#, ,!# ,"-.#0 2',%#6.#,1#1T $', ,!' * !-,"'2'-, ," '21 -.#0 2'-,1 2- 11'12  31#01 ', 11#11',% 2&# !-+. ,7_1 $', ,!' * NewSeriesBonds:,#0%72#0+31#"2- .-1'2'-,T "'12',%3'1& -,"1 2& 2 & 4#  $'012 *'#, -, 2&#  ,#20#4#,3#1-$,#0%7_1712#+1T Megawatt(“MW”):  +# 130# -$ #*#!20'!  .-5#0T   +#% 5 22 #/3 *1 SQRRR )'*-5 221 -0 OffSystem Sales: ?&-*#1 *# #*#!20'! 1 *#1 SQRRRQRRR5 221T -321'"# '21 32'*'27_1 !#02'$'! 2#" 1#04'!# 0# T *1-1##b712#+ *#1Tc Megawatthour (“MWh”):  +# 130# -$  #*#!20'!.-5#0!-,13+.2'-,T+#% 5 22V&-30 Other Postemployment Benefits (“OPEBs”): #/3 *1-,#+#% 5 22-$.-5#0$*-5',%$-0-,# -12#+.*-7+#,2 #,#$'21 -2� 2& , .#,1'-, &-30T #,#$'21T ; 1 ',!*3"# .-12#+.*-7+#,2  &# *2&! 0# #,#$'21Q 0#% 0"*#11 -$ 2&# 27.# -$ Mothballed: %#,#0 2'-, 0#1-30!# 2& 2 '1 .* , 2& 2 .0-4'"#1 2&#+Q ," ** .* !#"', ,', !2'4#12 2#1-2& 2'2! ,,#'2� .-12#+.*-7+#,2 #,#$'21 .0-4'"#" 1#. 0 2#*7 # 0-3%&2 ',2- -.#0 2'-, '++#"' 2#*7 ,-0 $0-+ .#,1'-,.* ,Q#6!*3"',% #,#$'21"#$',#" !-3,2#"2-5 0"12&#60'"_10#1#04#+ 0%',T 12#0+', 2'-, #,#$'21T  National Association of Regulatory Utility Overhead Conversion Fund:  .-02'-, -$ Commissioners (“NARUC”):  ,-,.0-$'2 ,#0%7_1 #. '0 ," #.* !#+#,2 !!-3,2 -0% ,'8 2'-, 5&-1# +#+ #01 ',!*3"# 2&# 2& 2 '1 32&-0'8#" 2- # 31#" $-0 !-,4#02',% %-4#0,+#,2 * %#,!'#12& 2 0##,% %#"',2&# -4#0&# "#*#!20'!$ !'*'2'#12-3,"#0%0-3,"T** 0#%3* 2'-, -$ 32'*'2'#1 ," ! 00'#01 ', 2&# WR +-3,21 ', 2&'1 $3," 5#0# 20 ,1$#00#" 2- 2&# @,'2#" 2 2#1Q 2&# ''120'!2 -$ -*3+ ' Q 3#02- 0' 3,"',2 ,3 07TRRWT '!- ,"2&#L'0%',01* ,"1T7@_1+#+ #0 %#,!'#10#%3* 2#2&# !2'4'2'#1-$#,#0%7Q5 2#0 PublicUtilityCommissionofTexas(“PUCT”): ,"2#*#!-++3,'! 2'-,132'*'2'#1T "&# %-4#0,+#,2 * !-++'11'-, 2& 2 0#%3* 2#1  2&# 0 2#1 ," 1#04'!#1 -$ 2#*#.&-,# 32'*'2'#1R Natural Gas Basis Swap:  $', ,!' * ',4#12-0V-5,#" #*#!20'!Q 5 2#0 ," 1#5#0 !-,20 !25&'!& **-51 2&# .30!& 1#0 2- *-!) 32'*'2'#1R #*#!20'!Q 5 2#0 ," 1#5#0 32'*'2'#1 ', ',2&#.0'!# "'$$#0#,!# #25##, 25-, 230 * % 1 3,',!-0.-0 2#" 0# 1R ," 0 "'- !-+. ,'#1 "#*'4#07 .-',21 -0 &3 1Q 13!& 1 K-312-, &'. 12 2#5'"#T"&#@""-#1,-2& 4# 32&-0'272- & ,,#* ,"K#,07K3 Q<T 0#%3* 2# 0#2 '* !2'4'2'#1 -$ +3,'!'. **7 -5,#"  32'*'2'#1T Net Costs Recoverable/Refundable: #02 ',  !-121 2& 2 0# 0#/3'0#" 2- # "#$#00#" 1  Put: , -.2'-, !-,20 !2 %'4',% 2&# -5,#0 2&# 0#%3* 2-07 11#2 -0  0#%3* 2-07 *' '*'27 3,"#0 0'%&2 32,-22&#- *'% 2'-,2-1#** 1.#!'$'#"  YSQ Accounting for the Effects of Certain +-3,2 -$ , 3,"#0*7',% 11#2 2  1#2 .0'!# Types of RegulationQ '$ 0#%3* 2'-, .0-4'"#1 5'2&', 1.#!'$'#"2'+#T 1130 ,!#2& 22
#!-121! , #0#!-4#0#"-0  0#$3,"#"2&0-3%&0 2#1',2&#$3230#T Refunding:#2'0',% ,-3212 ,"',% -,"'113#  $2#02&#$'012! **" 2# 731',%+-,#7$0-+2&# Net OPEB Obligation: "&# !3+3* 2'4# 1 *#-$ ,#5-$$#0',%T "'$$#0#,!# #25##, ,,3 * ;  !-12 ," 2&#  #+.*-7#01!-,20' 32'-,12-2&#.* ,T Required Supplementary Information:  !&#"3*#1Q 12 2'12'! * " 2  ," -2� Net Pension Obligation: "&# !3+3* 2'4# ',$-0+ 2'-, 2& 2 0# , #11#,2' * . 02 -$ "'$$#0#,!# #25##, ,,3 *.#,1'-,!-12 ,"2&# $', ,!' * 0#.-02',% ," 1&-3*" # .0#1#,2#" #+.*-7#01!-,20' 32'-,12-2&#.* ,T 5'2&Q 32 0# ,-2 . 02 -$Q 2&# 1'! $', ,!' *  12 2#+#,21-$ %-4#0,+#,2 *#,2'27T

 VYX ,#0%7 TRSR,,3 *#.-02  Revenue Bonds: -,"1 '113#" 7  ,"Q ', 1-+# ! 1#1Q 12 2# ," *-! * ',!-+# 2 6T +3,'!'. *'27',5&'!&2&#'113#0.*#"%#12-2&# & 230'2'#1 $-0 " ,-2#1Q &-5#4#0Q ! , # -,"&-*"#01 '21 0#4#,3#1 1 1#!30'27 $-0 2&# #62#,"#"',"#$','2#*7$-02&#*'$#-$2&#.0-%0 + -,"1T 2& 213..-0212&#",-2#1T  SA Energy Acquisition Public Facility Transmission Costs ofService (“TCOS”):  Corporation (“PFC”):  .3 *'! ,-,.0-$'2 $3,!2'-, *!* 11'$'! 2'-,-$#6.#,1#1 ,"! .'2 * !-0.-0 2'-, -0% ,'8#" 3,"#0 2&# * 51 -$ 2&# #6.#,"'230#1 0#* 2',% 2- 2&# -.#0 2'-, ," 2 2# -$ "#6 1 .3013 ,2 2- 2&# "#6 1 3 *'! + ',2#, ,!# -$ 2&# 20 ,1+'11'-, .* ,2T  "&# !'*'27 -0.-0 2'-, !2Q & .2#0 URUQ "#6 1 20 ,1+'11'-, $3,!2'-, '1 2& 2 .-02'-, -$ 2&# <-! * 6-4#0,+#,2 -"#T  "&# -0.-0 2'-,5 1 32'*'27 1712#+ 31#" $-0 2&# .30.-1# -$ -0% ,'8#"2- 11'122&#'27-$ ,,2-,'-', 20 ,1+'22',% #*#!20'! * #,#0%7 ', 3*) 2- -2� $', ,!',%Q 0#$', ,!',% -0 .0-4'"',% .3 *'! .0',!'. *. 021-$2&#1712#+-02--2�32'*'27 $ !'*'2'#1Q',!*3"',%, 230 *% 1Q2- #"#4-2#"2- 1712#+1T .3 *'!31#T  VariableRateDemandObligation(“VRDO”): Securities Lending: , ',4#12+#,2 120 2#%7  *-,%V2#0+ -," 5'2&  $*- 2',% ',2#0#12 0 2# 2& 2',4-*4#12&#2#+.-0 07*- ,-$1#!30'2'#12- 2& 2 4 0'#1 1 '2 '1 0#V"#2#0+',#" .#0'-"'! **7 ,-2� . 027Q 27.'! **7 "# *#01T  -0 2&# $3** " '*7Q5##)*7Q1#+'V ,,3 **7Q ,,3 **7Q#2!TT 2'+#2& 22&#1#!30'2'#1 0#-32-,*- ,Q2 0#  1#!30#"5'2&! 1& ," -0,-,! 1&!-** 2#0 *',  #6!#11-$2&#4 *3#-$2&#1#!30'2'#12& 2 0#*#,2Q  ," ', 0#230, $-0 2&# 31# -$ 1#!30'2'#1Q 2&#  *#,"#0 # 0,1  1.0# " -, 2&# ! 1& .*#"%#" 1 !-** 2#0 *T    SouthTexasProject(“STP”):300#,2*7 25-V 3,'2,3!*# 0.* ,22& 2'1-,#-$2&#,#5#12 ," * 0%#12 ,3!*# 0 .-5#0 .* ,21 ', 2&# !-3,207T "_1 25- 0# !2-01 & 4#  ! . !'27 -$ TQYRR +#% 5 221 -$ #*#!20'!'27Q #,-3%& 2- .0-4'"# 1#04'!# $-0 +-0# 2& , -,# +'**'-, &-+#1 ," 31',#11#1T STP Nuclear Operating Company (“STPNOC”):   ,-2V$-0V.0-$'2 #,2'27 2& 2 .0-4'"#1 $-0 2&# *'!#,1',%Q !-,1203!2'-,Q -.#0 2'-, ,"+ ',2#, ,!#-$2&#(-',2*7-5,#" ," -.#0 2#" #*#!20'! %#,#0 2'-, $ !'*'2'#1 -$ "T  System Sales: #2 '* #*#!20'! 1 *#1 5'2&', 2&# 32'*'27_1!#02'$'! 2#"1#04'!# 0# T  TaxExemptBond: -,"313 **7'113#" 7  +3,'!'. *Q !-3,27 -0 12 2# %-4#0,+#,2 $-0 5&'!&',2#0#12. 7+#,21 0#,-213 (#!22-2&# -,"&-*"#01_ $#"#0 * ',!-+# 2 6 ,"Q ', 1-+# ! 1#1Q12 2# ,"*-! *',!-+#2 6T TaxExempt Commercial Paper (“TECP”):  1&-02V2#0+ ,-2# 5'2&  + 6'+3+ + 230'27 -$ TYR " 71 $-0 5&'!& ',2#0#12 . 7+#,21 0# ,-2 13 (#!2 2- 2&# -,"&-*"#01_ $#"#0 * ',!-+# 2 6

 VYY [THIS PAGE INTENTIONALLY LEFT BLANK] APPENDIX C 

  CITY PUBLIC SERVICE            

UNAUDITED FINANCIAL STATEMENTS FOR THE QUARTER AND TWELVE MONTHS ENDED JULY 31, 2010 AND 2009 AND INDEPENDENT AUDITORS’ REPORT                                Balance Sheets (In thousands)

July 31, July 31, 2010 2009(1) ASSETS Current Assets: Unrestricted cash and investments……………………………………$ 335,742 $ 655,853 Receivables, net ………………………………………………………… 230,454 275,839 Inventories ……………………………………………………………… 153,129 165,847 Prepayments and other ………………………………………………… 52,809 92,888 Total current assets ……………………………………………… 772,134 1,190,427

Noncurrent assets: Cash and investments Restricted for debt service …………………………………………… 181,886 161,862 Restricted for capital projects ……………………………………… 181,588 324,915 Restricted per ordinance …………………………………………… 447,200 328,609 Restricted per ordinance …………………………………………… 44,596 49,368 Restricted for STP decommissioning ……………………………… 376,213 341,113 Restricted for Project Warm rate relief program ………………… 7,635 8,374 Other noncurrent assets and deferred costs ………………………… 508,713 503,005 Capital assets, net ……………………………………………………… 7,119,369 6,695,377 Total noncurrent assets …………………………………………… 8,867,200 8,412,623 TOTAL ASSETS …………………………………………………… $ 9,639,334 $ 9,603,050

LIABILITIES Current liabilities: Current maturities of revenue bonds ………………………………… $ 162,235 $ 148,705 Accounts payable and accrued liabilities …………………………… 442,951 838,441 Total current liabilities ……………………………………………… 605,186 987,146 Noncurrent liabilities: Long-term debt, net …………………………………………………… 4,762,269 4,481,757 STP decommissioning liability ………………………………………… 375,851 339,656 Other noncurrent liabilities and deferred credits …………………… 596,909 622,999 Total noncurrent liabilities …………………………………………… 5,735,029 5,444,412 Total liabilities ……………………………………………………… 6,340,215 6,431,558

FUND NET ASSETS Invested in plant, net of related debt ………………………………… 2,379,617 2,393,015 Restricted ……………………………………………………………… 578,098 456,396 Unrestricted ……………………………………………………………… 341,404 322,081 Total fund net assets ……………………………………………… 3,299,119 3,171,492 TOTAL LIABILITIES AND FUND NET ASSETS ……… $ 9,639,334 $ 9,603,050

(1) Certain amounts in the prior year have been reclassified to conform to the current-year presentation.



   Statements of Revenues, Expenses and Changes in Fund Net Assets

(In thousands) Quarter Quarter 12 Months 12 Months Ended Ended Ended Ended July 2010 July 2009 July 2010 July 2009 Revenues Electric …………………………………………………………$ 541,352 $ 560,998 $ 1,752,492 $ 1,747,170 Gas …………………………………………………………… 35,828 32,157 247,460 202,943 Total operating revenue ……………………………… 577,180 593,155 1,999,952 1,950,113 Nonoperating income, net ………………………………… 12,454 9,002 46,194 57,306 Total revenue…………………………………………… 589,634 602,157 2,046,146 2,007,419

Expenses Fuel, purchased power and distribution gas …………… 172,139 218,532 697,045 708,798 CPS Energy operation and maintenance (1)……………… 80,798 87,992 326,837 350,945 STP O&M, including decommissioning…………………… 39,699 38,764 187,700 156,775 Regulatory assessments…………………………………… 11,074 8,543 35,912 36,313 Depreciation and amortization……………………………… 76,512 72,741 298,256 280,599 Interest and other expense ………………………………… 40,035 33,925 140,486 135,783 Payments to the City of San Antonio ……………………… 88,688 79,262 268,447 263,930 Total expenses ……………………………………………… 508,945 539,759 1,954,683 1,933,143

Income (loss) before other changes in fund net assets……………………………………………… 80,689 62,398 91,463 74,276 Other payments to the City of San Antonio……………… - - (9,630) (11,553) Contributed capital ………………………………………… 3,840 6,664 36,006 26,702 Effect of defined benefit plan funding obligations - STP………………………………… - - 9,788 (29,726) CHANGE IN FUND NET ASSETS ……………………………… 84,529 69,062 127,627 59,699

FUND NET ASSETS – BEGINNING …………………………… 3,214,590 3,102,430 3,171,492 3,111,793 FUND NET ASSETS – ENDING …………………………………$ 3,299,119 $ 3,171,492 $ 3,299,119 $ 3,171,492

(1) Includes annual OPEB costs, annual pension costs, pollution remediation and Save for Tomorrow Energy Program expenses.



  APPENDIX D

______CPS ENERGY

CERTAIN PROVISIONS OF THE ORDINANCE [THIS PAGE INTENTIONALLY LEFT BLANK] CERTAIN PROVISIONS OF THE ORDINANCE

The following constitutes a summary of certain selected provisions of the Ordinance. This summary should be qualified by reference to other provisions of the Ordinance referred to elsewhere in this Official Statement, and all references and summaries pertaining to the Ordinance in this Official Statement are, separately and in whole, qualified by reference to the exact terms of the Ordinance, a copy of which may be obtained from the City.

Section 1.1. Definitions.

For all purposes of this Ordinance, except as otherwise expressly provided or unless the context otherwise requires, (a) the terms defined in this Section have the meanings assigned to them in this Section, certain terms defined in other sections of and the preamble to this Ordinance have the meanings assigned to them in such sections and preamble, and all such terms include the plural as well as the singular; (b) all references in this Ordinance to designated “Sections,” “Schedules,” “Exhibits,” and other subdivisions are to the designated Sections, Schedules, Exhibits, and other subdivisions of this Ordinance as originally adopted; and (c) the words “herein,” “hereof,” and “hereunder” and other words of similar import refer to this Ordinance as a whole and not to any particular Section or other subdivision.

“‘AA’ Composite Commercial Paper Rate” on any date of determination means (1) the interest equivalent of the 30-day rate on financial commercial paper placed on behalf of issuers whose corporate bonds are rated “AA” by S&P, or the equivalent of such rating by Moody’s or Fitch as made available on a discount basis or otherwise by the Federal Reserve Bank for “AA” financial commercial paper on its World Wide Web site for the Market Day immediately preceding such date of determination, or (2) if the Federal Reserve Bank does not make available any such rate, then the arithmetic average of the interest equivalent of the 30-day rate on financial commercial paper, as quoted on a discount basis or otherwise by the Commercial Paper Dealers to the Auction Agent for the close of business on the Market Day immediately preceding such date of determination; provided that if any Commercial Paper Dealer does not quote a financial commercial paper rate required to determine the “AA” Composite Commercial Paper Rate, the “AA” Composite Commercial Paper Rate shall be determined on the basis of such quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers selected by a Market Agent at the request of the City to provide such quotation or quotations not being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or if a Market Agent does not select any such Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers. For purposes of this definition, the “interest equivalent” of a rate stated on a discount basis (referred to in this definition as a “discount rate”) for commercial paper of a given day’s maturity shall be equal to the product of (a) 100 and (b) the quotient (rounded upwards to the next higher one thousandth (.001) of 1%) of (i) the discount rate (expressed in decimals) divided by (ii) the difference between (x) 1.00 and (y) a fraction, the numerator of which shall be the product of the discount rate (expressed in decimals) times the number of days in which such commercial paper matures and the denominator of which shall be 360.

“Accountant” means a certified public accountant or accountants or a firm of certified public accountants, in either case with demonstrated experience and competence in public accountancy.

“Acts” has the meaning stated in the preamble to this Ordinance.

“Additional Junior Lien Obligations” means (1) any bonds, notes, warrants, certificates of obligation, or other Debt (other than the Bonds and the currently outstanding Junior Lien Obligations) hereafter issued by the City that are payable, in whole or in part, from and equally and ratably secured by a lien on and pledge of the Net Revenues that is junior and inferior to the lien on and pledge of the Net Revenues that have or will be granted as security for the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued by the City, on a parity with the lien on and pledge of the Net Revenues that have been or are being granted as security for the currently outstanding Junior Lien Obligations and the Bonds, and prior and superior to the lien on and pledge of the Net Revenues that have or will be granted as security for the Commercial Paper Obligations and any Inferior Lien Obligations hereafter issued by the City and (2) obligations hereafter issued to refund any of the foregoing if issued in a manner that provides that the refunding bonds are payable from and equally and ratably secured, in whole or in part, by such a junior and inferior lien on and pledge of the Net Revenues as determined by the City Council in accordance with applicable law.

“Additional Senior Lien Obligations” means (1) any bonds, notes, warrants, certificates of obligation, or other evidences of indebtedness which the City reserves the right to issue or enter into, as the case may be, in the future under the terms and conditions provided in Section 6.2 and which are equally and ratably secured solely by a prior and first lien on and pledge of the Net Revenues of the Systems and (2) any obligations hereafter issued to refund any of the foregoing if issued in a manner so as to be payable from and secured by a prior and first lien on and pledge of the Net Revenues as determined by the City Council in accordance with applicable law. D-1 “Adjusted Auction Rate” means the Auction Rate plus the Service Charge Rate.

“Applicable Factor” means for (1) each Interest Period for Bonds in an Auction Mode immediately preceded by an Auction Date, the excess of (a) the Adjusted Auction Rate for such Bonds in such Interest Period over (b) the Service Charge Rate for such Interest Period and (2) each Interest Period for Bonds in an Auction Mode not immediately preceded by an Auction Date, the Adjusted Auction Rate for such Bonds in such Interest Period.

“Applicable Percentage” on any date of determination means the percentage determined as set forth below (as such percentage may be adjusted pursuant to Section 2.3G(1)) based on the Prevailing Rating of the Bonds while in an Auction Mode in effect at the close of business on the Market Day immediately preceding such date of determination:

Prevailing Rating Applicable Percentage

“AAA” 175%

“AA” 200

“A” 250

“BBB” 275

Below “BBB” 300

“Approval Certificate” means a written instrument executed by a Designated Financial Officer in accordance with Sections 2.1, 2.2C, or 2.5B.

“Auction” means each periodic implementation of the Auction Procedures.

“Auction Agent” means the person appointed by the City to act as Auction Agent for the Bonds in an Auction Mode in accordance with Section 2.2H until a substitute Auction Agent becomes such pursuant to such Section, and thereafter “Auction Agent” shall mean such successor.

“Auction Agent Fee Rate” for any Interest Period in an Auction Mode means the rate per annum at which the fee to be paid to the Auction Agent for the services rendered by it under the Auction Agreement and the Broker-Dealer Agreements with respect to the Auction Date, if any, at the end of such Interest Period accrues.

“Auction Agreement” means any Auction Agent Agreement entered into by the Paying Agent/Registrar and the Auction Agent in accordance with Section 2.2H, as originally executed or as supplemented, modified, or amended from time to time.

“Auction Date” means the Market Day immediately preceding the first day of each Interest Period for Bonds in an Auction Mode, other than Interest Periods commencing:

(1) after the Bonds are no longer Book-Entry Only Bonds;

(2) after the occurrence and during the continuance of a Payment Default; or

(3) less than two Market Days after the cure or waiver of a Payment Default, on which dates no Auction shall occur.

“Auction Mode” for any Bond means the period of time, determined in accordance with Sections 2.2B and 2.2C, during which interest on such Bond accrues at the Adjusted Auction Rate therefor.

“Auction Procedures” means the procedures for conducting Auctions for the purchase or retention of Bonds specified in Section 2.3.

“Auction Rate” for Bonds in an Auction Mode, for the Interest Period immediately following an Auction Date, means the rate that the Auction Agent advises the Paying Agent/Registrar has resulted from implementation of the Auction Procedures on such Auction Date. D-2 “Available Bonds” as of an Auction Date means the aggregate principal amount of Bonds in an Auction Mode with Interest Periods of applicable duration that are not subject to Submitted Hold Orders at the close of business on the immediately preceding Record Date for such Bonds.

“Available Money” means all amounts as to which the Paying Agent/Registrar and the Credit Enhancer have received an Opinion of Counsel stating that no disbursement thereof pursuant to this Ordinance may be avoided or otherwise recovered under Section 547 (or under Section 550 in respect of such Section) of the Bankruptcy Code or under any similar provision of state law in the event of the bankruptcy, insolvency, liquidation, reorganization, or similar proceeding in respect of the City.

“Bank Bond” as of any date means any Bond or portion thereof which has been purchased by the Liquidity Bank pursuant to Section 2.6D(2) on or before such date, if on or before such date and subsequent to such purchase (1) such Bond or portion has not been sold by the Holder thereof through the Remarketing Agent against payment of the Purchase Price therefor and (2) the Bank Bondholder of such Bond or portion shall not have declined to sell such Bond or portion on demand of the Remarketing Agent in accordance with the provisions of the Liquidity Facility.

“Bank Bond Register” has the meaning stated in Section 2.4.

“Bank Bondholder” when used with respect to any Bank Bond means the Person in whose name such Bank Bond is registered in the Bank Bond Register.

“Bank Differential” when used with respect to any Bank Bond (or portion thereof) as of any date means the difference, if positive, obtained by subtracting (1) interest accrued thereon to such date from the most recent Interest Payment Date to which interest on such Bond (or portion) has been paid or duly provided for at the Daily Rate, Weekly Rate, Commercial Paper Rate, or Term Rate applicable thereto from time to time in effect to such date, determined as if such Bond (or portion) were not a Bank Bond and such interest were not compounded, from (2) all interest actually accrued on such Bank Bond (or portion) from such Interest Payment Date to such date.

“Bank Rate” means, for each day of accrual, (1) except as described in Clause (2) of this definition, the rate defined as such in the initial Liquidity Facility, or (2) any different rate defined as the “Bank Rate” in any alternate Liquidity Facility accepted by the Paying Agent/Registrar pursuant to Section 4.1C, if the Paying Agent/Registrar shall have received an Opinion of Counsel to the effect that the accrual of interest on Bank Bonds at such different rate is authorized under Texas law and will not adversely affect any excludability of interest on any Bond from the gross income of the owner thereof for federal income tax purposes.

“Bankruptcy Code” means Title 11, United States Code, as now or hereafter constituted.

“Bid” has the meaning specified in Section 2.3A(1).

“Bidder” has the meaning stated in Section 2.3A(1).

“Board” or “Board of Trustees” means the Board of Trustees of the Systems confirmed and described in Section 6.10.

“Bond Fund” shall mean the special Fund or account created and established by the provisions of Section 5.2.

“Bonds” means the CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, SERIES 2004, authorized by this Ordinance.

“Book-Entry Only Bond” means any Bond registered in the name of the Securities Depository or its nominee.

“Broker-Dealer” for the Bonds in an Auction Mode means any broker or dealer (each as defined in the Securities Exchange Act of 1934, as amended), commercial bank, or other entity that is permitted by law to perform the function required of a Broker-Dealer by the Auction Procedures for the benefit of Existing Owners and Potential Owners of Bonds, is a member of (or a participant in) the Securities Depository, has been selected by the City with the approval of the Market Agent, and is a party to a Broker-Dealer Agreement with the Auction Agent that remains effective. Such selection of the City shall be evidenced by an ordinance or resolution enacted by the City Council or, if the Person selected to act as a Broker-Dealer for the Bonds is then the Remarketing Agent, may be evidenced by an Approval Certificate.

D-3 “Broker-Dealer Agreement” means each Broker-Dealer Agreement entered into between the Auction Agent and a Broker-Dealer with the approval of the City, as originally executed or as supplemented, modified, or amended from time to time.

“Broker-Dealer Fee Rate” for any Interest Period for the Bonds in an Auction Mode means the rate per annum at which the service charge to be paid to the Broker-Dealers for the services rendered by them with respect to the Auction Date, if any, at the end of such Interest Period accrues.

“Business Day” for the Bonds or portions thereof means any day other than (1) a Saturday or a Sunday, (2) a legal holiday or the equivalent on which banking institutions generally are authorized or required to close in the Place of Payment or in the city in which is located the corporate trust office of the Paying Agent/Registrar or, on or before the first day of the Fixed Mode (and except while an Auction Mode is in effect) for such Bonds or portions, the principal office of the Remarketing Agent or, while a Credit Facility is in effect, the office of the Credit Enhancer or of its agent at which drafts or demands for payment under the Credit Facility are to be presented or, while the Liquidity Facility is in effect, the office of any Liquidity Bank or of its agent at which drafts or demands for payment under the Liquidity Facility are to be presented, or (3) a day on which the New York Stock Exchange is closed.

“City” means the City of San Antonio, Texas, and, where appropriate, the City Council of the City.

“Closing Date” shall mean the date of physical delivery of the Initial Bonds against payment in full by the Purchaser.

“Code” means the Internal Revenue Code of 1986, as amended and in force and effect on the Closing Date.

“Commercial Paper Dealers” means such commercial paper dealer or dealers as the City may from time to time appoint or, in lieu of any thereof, their respective affiliates or successors.

“Commercial Paper Mode” for any Bond or portion thereof means any period of time, determined in accordance with Section 2.2C, during which interest on such Bond or portion (except when a Bank Bond) accrues at the Commercial Paper Rate therefor.

“Commercial Paper Obligations” means (1) the currently authorized obligations of the City from time to time outstanding and unpaid that are payable wholly or in part from a lien on and pledge of the Net Revenues that is subordinate and inferior to the pledge thereof securing payment of the currently outstanding Senior Lien Obligations and Junior Lien Obligations, the Bonds, and any Additional Senior Lien Obligations and Additional Junior Lien Obligations hereafter issued by the City, all as further provided in Section 6.2, identified as follows:

“City of San Antonio, Texas Electric and Gas Systems Commercial Paper Notes, Series A”, originally authorized in the aggregate principal amount of $450,000,000, including the Credit Agreement (as defined in the ordinance authorizing the issuance of the Commercial Paper Obligations); and

(2) obligations hereafter issued to refund any of the foregoing if issued in a manner that provides that the refunding obligations are payable from and equally and ratably secured, in whole or in part, by such a subordinate and inferior lien on and pledge of the Net Revenues as determined by the City Council in accordance with applicable law.

“Commercial Paper Rate” for any Bond or portion thereof has the meaning stated in Section 2.2B, to be determined in accordance with Section 2.2E(4).

“Credit Agreement” means a loan agreement, revolving credit agreement, agreement establishing a line of credit, letter of credit, reimbursement agreement, insurance contract, commitments to purchase debt, purchase or sale agreements, interest rate swap agreements, or commitments or other contracts or agreements authorized, recognized, and approved by the City as a Credit Agreement in connection with the authorization, issuance, security, or payment of any obligation authorized by Chapter 1371, as amended, Texas Government Code.

“Credit Enhancer” means the obligor on the Credit Facility, if any, most recently accepted by the Paying Agent/Registrar pursuant to Section 4.2K and such obligor’s successors in such capacity and assigns.

“Credit Enhancer Default” means the occurrence and continuance of one or more of the following events: (1) wrongful dishonor of any demand or claim made under the Credit Facility, (2) the issuance, under the applicable laws D-4 of any state, of an order of rehabilitation, liquidation, or dissolution of the Credit Enhancer; (3) the commencement by the Credit Enhancer of a voluntary case or other proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect including, without limitation, the appointment of a Paying Agent/Registrar, receiver, liquidator, custodian, or other similar official for itself or any substantial part of its property; (4) the consent by the Credit Enhancer to any relief referred to in the preceding Clause (3) in an involuntary case or other proceeding commenced against it; (5) the making by the Credit Enhancer of an assignment for the benefit of creditors; (6) the failure of the Credit Enhancer generally to pay its debts or claims when due; or (7) the initiation by the Credit Enhancer of any action to authorize any of the foregoing.

“Credit Facility” means the obligation most recently accepted by the Paying Agent/Registrar pursuant to Section 4.2K, if any, including all endorsements, amendments, and extensions thereof.

“Daily Mode” for any Bond or portion thereof means any period of time, determined in accordance with Section 2.2C, during which interest on such Bond (except when a Bank Bond) accrues at the Daily Rate therefor.

“Daily Rate” has the meaning stated in Section 2.2B, to be determined in accordance with Section 2.2E(1).

“Debt” means (1) all indebtedness payable from Net Revenues incurred or assumed by the City for borrowed money (including indebtedness payable from Net Revenues arising under Credit Agreements) and all other financing obligations of the Systems payable from Net Revenues that, in accordance with generally accepted accounting principles, are shown on the liability side of a balance sheet; and (2) all other indebtedness payable from Net Revenues (other than indebtedness otherwise treated as Debt hereunder) for borrowed money or for the acquisition, construction, or improvement of property or capitalized lease obligations pertaining to the Systems that is guaranteed, directly or indirectly, in any manner by the City, or that is in effect guaranteed, directly or indirectly, by the City through an agreement, contingent or otherwise, to purchase any such indebtedness or to advance or supply funds for the payment or purchase of any such indebtedness or to purchase property or services primarily for the purpose of enabling the debtor or seller to make payment of such indebtedness, or to assure the owner of the indebtedness against loss, or to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether or not such property is delivered or such services are rendered), or otherwise. For the purpose of determining Debt, there shall be excluded any particular Debt if, upon or prior to the maturity thereof, there shall have been deposited with the proper depository (a) in trust the necessary funds (or investments that will provide sufficient funds, if permitted by the instrument creating such Debt) for the payment, redemption, or satisfaction of such Debt or (b) evidence of such Debt deposited for cancellation; and thereafter it shall not be considered Debt. No item shall be considered Debt unless such item constitutes indebtedness under generally accepted accounting principles applied on a basis consistent with the financial statements of the Systems in prior Fiscal Years.

“Debt Service Requirements” means as of any particular date of computation, with respect to any obligations and with respect to any period, the aggregate of the amounts to be paid or set aside by the City as of such date or in such period for the payment of the principal of, premium, if any, and interest (to the extent not capitalized) on or other payments due under such obligation, assuming, in the case of obligations without a fixed numerical rate, that such obligations bear interest or other payment obligations calculated by assuming (1) that such non-fixed interest rate for every future 12-month period is equal to the rate of interest reported in the most recently published edition of The Bond Buyer (or its successor) at the time of calculation as the “Revenue Bond Index” or, if such Revenue Bond Index is no longer being maintained by The Bond Buyer (or its successor) at the time of calculation, such interest rate shall be assumed to be 80% of the most recently reported yield, as of the time of calculation, at which United States Treasury obligations of like maturity have been sold and (2) that, in the case of bonds not subject to fixed scheduled mandatory sinking fund redemptions, that the principal of such bonds is amortized such that annual debt service is substantially level over the remaining stated life of such bonds, and in the case of obligations required to be redeemed or prepaid as to principal prior to Stated Maturity according to a fixed schedule, the principal amounts thereof will be redeemed prior to stated maturity in accordance with the mandatory redemption provisions applicable thereto (in each case notwithstanding any contingent obligation to redeem bonds more rapidly). For the term of any interest rate hedge agreement entered into in connection with any such obligations, Debt Service Requirements shall be computed by netting the amounts payable to the City under such hedge agreement from the amounts payable by the City under such hedge agreement and such obligations.

“Depository” means one or more official depository banks of the Board.

“Designated Financial Officer” means the chief executive officer of the Board, the chief financial officer of the Board, or such other financial or accounting official of the Board so designated by the City Council.

D-5 “DTC Participant” means those broker-dealers, banks, and other financial institutions reflected on the books of the Securities Depository.

“Eligible Bonds” has the meaning stated in the Liquidity Facility or, if not defined in the Liquidity Facility, means the Bonds or portions thereof for which the Liquidity Bank is obligated to pay the Purchase Price when such Bonds or portions are tendered or deemed tendered for purchase in accordance with Section 2.6.

“Existing Owner” of Bonds in an Auction Mode means a person who has signed a Master Purchaser’s Letter delivered to a Broker-Dealer and is listed as a beneficial owner of Bonds in the records of the Auction Agent.

“Fiscal Year” means the twelve-month accounting period used by the Board in connection with the operation of the Systems, currently ending on January 31 of each year, which may be any 12 consecutive month period established by the Board, but in no event may the Fiscal Year be changed more than one time in any three calendar year period.

“Fitch” means Fitch Ratings, a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Fitch” shall mean any other nationally recognized securities rating agency designated by the Board and acceptable to the Credit Enhancer.

“Fixed Mode” for any Bond or portion thereof means any period of time, determined in accordance with Section 2.2C , during which interest on such Bond or portion accrues at the Fixed Rate therefor.

“Fixed Rate” has the meaning stated in Section 2.2B, determined in accordance with Section 2.2E(5).

“Government Obligations” shall mean (1) direct noncallable obligations of the United States, including obligations that are unconditionally guaranteed by, the United States of America; (2) noncallable obligations of an agency or instrumentality of the United States, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent; or (3) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the governing body of the issuer adopts or approves the proceedings authorizing the issuance of refunding bonds, are rated as to investment quality by a nationally recognized investment rating firm not less than AAA or its equivalent.

“Holder” of any Bond means the Person in whose name such Bond is registered in the Securities Register, subject to Section 4.2H.

“Hold Order” has the meaning specified in Section 2.3A(1).

“Ineligible Owner” of Bonds means (1) the City, (2) any person (whether for-profit or not-for-profit) which “controls” or is “controlled” by or is under common “control” with the City, and (3) any person who owns such Bonds on behalf or for the benefit or account of the City or a person described in the preceding Clause (2). For purposes of this definition, a person “controls” another person when the first person possesses or exercises, directly or indirectly through one or more other affiliates or related entities, the power to direct the management and policies of the other person, whether through the ownership of voting rights, membership, the power to appoint members, trustees, or directors, by contract, or otherwise.

“Inferior Lien Obligations” means (1) any bonds, notes, warrants, certificates of obligation, or other Debt hereafter issued by the City that are payable from and equally and ratably secured, in whole or in part, by a lien on and pledge of the Net Revenues that is subordinate and inferior to the pledges thereof securing payment of the currently outstanding Senior Lien Obligations and Junior Lien Obligations, the Bonds, the Commercial Paper Obligations, and any Additional Senior Lien Obligations and Additional Junior Lien Obligations hereafter issued by the City, including certificates described in Section 271.052, as amended, Texas Government Code, and (2) obligations hereafter issued to refund any of the foregoing if issued in a manner that provides that the refunding bonds are payable from and equally and ratably secured, in whole or in part, by such an inferior lien on and pledge of the Net Revenues as determined by the City Council in accordance with applicable law.

“Initial Bond” has the meaning stated in Section 2.9.

D-6 “Interest Mode” means any Daily Mode, Weekly Mode, Auction Mode, Commercial Paper Mode, Term Mode, or Fixed Mode.

“Interest Payment Date” for any Bond or portion thereof means the date specified in such Bond as a fixed date on which interest on such Bond or portion is due and payable.

“Interest Period” for any Bond or portion thereof means the period of time from and including the Closing Date or any Rate Adjustment Date for such Bond or portion, as applicable, to but excluding the next succeeding Rate Adjustment Date for, or the Maturity of, such Bond or portion, as applicable.

“Junior Lien Obligations” means (1) the outstanding and unpaid obligations of the City that are payable solely from and equally and ratably secured by a junior and inferior lien on and pledge of the Net Revenues of the Systems, identified as follows:

“City of San Antonio, Texas Electric and Gas Systems Junior Lien Revenue Bonds, Series 2003”, dated May 1, 2003 and originally issued in the total aggregate principal amount of $250,000,000, including the Liquidity Facility (as defined in the ordinance authorizing issuance of such bonds), and (2) obligations hereafter issued to refund any of the foregoing if issued in a manner so as to be payable from and equally and ratably secured by a junior and inferior lien on and pledge of the Net Revenues of the Systems as determined by the City Council in accordance with any applicable law.

“LIBOR” on any date of determination means the most recently published London Interbank Borrowing Rate (LIBOR) for loans with a term closest to the term of the applicable ensuing Interest Period for the Bonds in an Auction Mode, determined by the Market Agent.

“Liquidity Bank” means BNP Paribas, a banking organization organized under the laws of the Republic of France, acting through its San Francisco Branch, in its capacity as obligor on the initial Liquidity Facility, and its successors in such capacity and assigns permitted by the terms thereof, until the initial Liquidity Facility is released pursuant to Section 4.1B(4) or (5), and thereafter “Liquidity Bank” shall mean the obligor on any alternate Liquidity Facility accepted by the Paying Agent/Registrar in substitution therefor pursuant to Section 4.1C and its successors in such capacity and assigns permitted by the terms thereof.

“Liquidity Facility” means that certain Standby Bond Purchase Agreement, dated as of November 1, 2004, among the Paying Agent/Registrar (for the benefit of the Holders), the City, and the initial Liquidity Bank and any amendments and extensions thereof accepted by the Paying Agent/Registrar in accordance with the provisions of Section 4.1C, until such Liquidity Facility is released pursuant to Section 4.1B(4) or (5), and thereafter “Liquidity Facility” shall mean any alternate obligation accepted by the Paying Agent/Registrar in substitution therefor pursuant to Section 4.1C and any amendments and extensions thereof so accepted.

“Maintenance and Operating Expenses” means those expenses (not paid from the proceeds of any Debt) required by law (Section 1502.056, as amended, Texas Government Code) to be a first lien on and charge against the income of the Systems, including the cost of insurance; the purchase and carrying of stores, materials, and supplies; the purchase, manufacture, and production of gas and electricity for distribution and resale; the payment of salaries; and the payment of all other expenses properly incurred in operating and maintaining the Systems and keeping them in good repair and operating condition (classed as a maintenance and operating expense as opposed to a capital expenditure under the Uniform System of Accounts adopted by the National Association of Regulatory Utility Commissioners). Depreciation on the properties of the Systems shall not be considered or included as Maintenance and Operating Expenses in the determination of Net Revenues of the Systems.

“Market Agent” for the Bonds in an Auction Mode means the Person appointed as “Market Agent” by the City pursuant to Section 2.6F, until a substitute Market Agent is appointed pursuant to such Section, and thereafter “Market Agent” shall mean such successor.

“Market Agent Agreement” means a Market Agent Agreement entered into between the Paying Agent/Registrar and the Market Agent, as amended and supplemented from time to time in accordance with its terms, while such agreement remains in effect.

D-7 “Market Agent Fee Rate” for any Interest Period for Bonds in an Auction Mode means the rate per annum necessary to accrue the fees, if any, and reimbursement of costs of rating maintenance and opinions of counsel payable by the Auction Agent to the Market Agent pursuant to its Market Agent Agreement.

“Market Day” means a day other than a Saturday, Sunday, or other day on which the New York Stock Exchange or banks generally are authorized to close in New York, New York, or San Antonio, Texas, or on which the Auction Agent or any Broker-Dealer is not open for business; provided, however, that April 14, April 15, December 24, December 30, and December 31 shall not be considered Market Days with respect to the determination of Auction Dates.

“Market Rate” means the rate determined on any Rate Determination Date pursuant to Section 2.2E(6).

“Master Purchaser’s Letter” for the Bonds in an Auction Mode means a letter in form and substance satisfactory to the Paying Agent/Registrar Agent and the Market Agent and attached to the Broker-Dealer Agreements, addressed to a Broker-Dealer, among others, in which a Person agrees, among other things, to offer to purchase, to purchase, to offer to sell and/or to sell Bonds in accordance with the Auction Procedures.

“Maturity” when used with respect to any Bond means the date on which the principal of such Bond becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration or call for redemption or otherwise, but does not include payment of the portion of the Purchase Price corresponding to principal of such Bond pursuant to Section 2.6.

“Maximum Rate” for any Interest Period for Bonds in an Auction Mode means a per annum interest rate equal to the lesser, all determined as of the preceding Market Day, of (1) the product of the Applicable Percentage and the Reference Rate or (2) 15% per annum minus the Service Charge Rate for such Interest Period; provided that if the Bonds are not then Book-Entry Only Bonds on such Market Day, the “Maximum Rate” for such Bonds and Interest Period shall mean an interest rate per annum equal to the lesser, determined as of such Market Day, of (1) the Applicable Percentage multiplied by the Reference Rate or (2) 15% per annum.

“Minimum Rate” for any Interest Period for Bonds in an Auction Mode means an interest rate per annum equal to 45% (as such percentage may be adjusted pursuant to Section 2.3G) of the Reference Rate on the Market Day preceding such Interest Period; provided, however, that in no event shall such Minimum Rate exceed the excess of (a) 15% per annum over (b) the Service Charge Rate for such Interest Period; and provided, further, that the Minimum Rate shall not exceed the Maximum Rate.

“Moody’s” means Moody’s Investors Services, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “Moody’s” shall be deemed to refer to any other nationally recognized Rating Service designated by the Board and acceptable to the Credit Enhancer.

“Net Revenues” means all income and revenues from the operation of the Systems after the deduction of Maintenance and Operating Expenses. The term Net Revenues shall also include any additional and further security for the payment of the Bonds as may be pledged therefor consistent with the then applicable laws of the State of Texas, provided that any such additional and further security is made equally and ratably applicable as security for all Outstanding Bonds.

“No Auction Rate” has the meaning stated in paragraph (l)(v) of the insert to the Bonds set forth in Section 2.2B.

“Notice of Fee Rate Change” means a notice of a change in the Auction Agent Fee Rate or a Broker-Dealer Fee Rate substantially in the form set forth in the Auction Agreement.

“Opinion of Counsel” means a written opinion of counsel who may (except as otherwise expressly provided in this Ordinance) be counsel for one or more of the City, the Credit Enhancer, or the Liquidity Bank and, when given with respect to the status of interest on any Bond under federal income tax law, shall be counsel of nationally recognized standing in the field of municipal bond law and, when given with respect to any matter under the Bankruptcy Code, shall be counsel of nationally recognized standing in the field of bankruptcy law.

“Order” means a Hold Order, Bid, or Sell Order.

“Ordinance” means this ordinance adopted by the City Council.

D-8 “Outstanding,” when used in this Ordinance with respect to Bonds means, as of the date of determination, all Bonds issued and delivered under this Ordinance, except:

(1) Cancelled Bonds: those Bonds canceled by the Paying Agent/Registrar or delivered to the Paying Agent/Registrar for cancellation;

(2) Defeased Bonds: those Bonds for which payment has been duly provided by the City in accordance with the provisions of Section 4.4 by the irrevocable deposit with the Paying Agent/Registrar, or an authorized escrow agent, of money or Government Obligations, or both, in the amount necessary to fully pay the principal of, premium, if any, and interest thereon to Maturity; provided that, (a) if such Bonds are to be redeemed, notice of redemption thereof shall have been duly given pursuant to this Ordinance or irrevocably provided to be given to the satisfaction of the Paying Agent/Registrar, or waived, (b) if such Bonds are in a Daily Mode or Weekly Mode, such Bonds are to be redeemed within 30 days after such deposit, and if such Bonds are in an Auction Mode, Commercial Paper Mode, or Term Mode, such Bonds or portions thereof are to be redeemed on the next Rate Adjustment Date therefor, (c) if a Liquidity Facility is in effect hereunder, an Opinion of Counsel acceptable to each Rating Service is delivered to the Paying Agent/Registrar to the effect that no payment of principal of (and premium, if any) or interest on such Bonds made from such deposit may be avoided or otherwise recovered under Section 547 (either directly or by application of Section 550) of the Bankruptcy Code or any similar provision of state law, except possibly as a payment to an “insider” of the City, as defined in Section 101 of the Bankruptcy Code, and (d) unless such Bonds are in a Fixed Mode, the Paying Agent/Registrar shall have received written confirmation from each Rating Agency that no rating assigned by it to the Bonds will be withdrawn or reduced as a result of such Bonds no longer being Outstanding; and

(3) Replaced Bonds: those Bonds that have been mutilated, destroyed, lost, or stolen and replacement Bonds have been registered and delivered in lieu thereof as provided in Section 2.12.

“Overdue Rate” for any Interest Period in an Auction Mode means a per annum rate of interest determined on the first day of such Interest Period equal to the lesser of (1) 300% (or such other percentage, if any, to which such percentage has been adjusted pursuant to Section 2.3G(1)) of the Reference Rate on such day or (2) 15% per annum.

“Paying Agent/Registrar” means the financial institution specified in Section 2.4 or its herein permitted successors and assigns.

“Payment Default” has the meaning stated in paragraph (l)(vii) of the insert to the Bonds set forth in Section 2.2B. A Payment Default shall “exist” if it shall have occurred and be continuing.

“Person” means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, or government or any agency or political subdivision thereof.

“Place of Payment” for Bonds means the city in which is located the office designated by the Paying Agent/Registrar at which principal of the Bonds shall be paid at Maturity.

“Potential Owner” of Bonds in an Auction Mode means any Person, including any Existing Owner of such Bonds, who (1) shall have executed a Master Purchaser’s Letter delivered to a Broker-Dealer and (2) may be interested in acquiring a new or additional beneficial interest in Bonds or portions thereof.

“Predecessor Bond” has the meaning stated in Section 2.8H.

“Prevailing Rating” of the Bonds in an Auction Mode means the then current rating by S&P, Moody’s, and Fitch, or the equivalent of each such rating by a substitute Rating Service selected as provided below, and will be:

(1) “AAA” if the Bonds have a rating of “AAA” by S&P, a rating of “Aaa” by Moody’s, and a rating of “AAA” by Fitch, or the equivalent of such rating by a substitute Rating Service selected as provided below;

D-9 (2) if not “AAA”, then “AA” if the Bonds have a rating of “AA-” or better by S&P, “Aa3” or better by Moody’s, and “AA-” or better by Fitch, or the equivalent of such rating by a substitute Rating Service selected as provided below;

(3) if not “AAA” or “AA”, then “A” if the Bonds have a rating of “A-” or better by S&P, a rating of “A3” or better by Moody’s, and a rating of “A-” or better by Fitch, or the equivalent of such rating by a substitute Rating Service selected as provided below;

(4) if not “AAA”, “AA”, or “A”, then “BBB” if the Bonds have a rating of “BBB-” or better by S&P, a rating of “Baa3” or better by Moody’s, and a rating of “BBB-” or better by Fitch, or the equivalent of such rating by a substitute Rating Service selected as provided below; and

(5) if not “AAA”, “AA”, “A”, or “BBB”, then Below “BBB”, whether or not the Bonds are rated by any securities rating agency.

If (a) the Bonds are rated by a nationally recognized securities statistical rating agency or agencies other than S&P, Moody’s, or Fitch because S&P, Moody’s, or Fitch ratings are not available, and (b) the City has delivered to the Paying Agent/Registrar and the Auction Agent an instrument designating one, two, or three of such rating agencies to replace S&P, Moody’s, and Fitch, then for purposes of the definition S&P, Moody’s, and Fitch will be deemed to have been replaced in accordance with such instrument; provided, however, that such instrument must be accompanied by the consent of the Market Agents. For purposes of this definition, S&P’s rating categories of “AAA,” “AA-,” “A-,” and “BBB-,” Moody’s rating categories of “Aaa,” “Aa3,” “A3,” and “Baa3,” and Fitch’s rating categories of “AAA,” “AA-,” “A-,” and “BBB-” refer to and include the respective rating categories correlative thereto in the event that such rating agencies have changed or modified their generic rating categories. If the prevailing ratings for the Bonds are split between categories set forth above, the lower rating will determine the Prevailing Rating.

“Purchase Date,” when used with respect to any Bond or portion thereof, means the date upon which the Paying Agent/Registrar is obligated to effect the purchase of such Bond or portion on the terms described in Section 2.6A.

“Purchase Fund” means the fund of the Paying Agent/Registrar so defined in Section 2.6C.

“Purchase Price” of any Bond (or portion thereof) required to be purchased pursuant to the terms of Section 2.6A means an amount equal to 100% of the principal amount of such Bond (or portion), plus interest, if any, accrued thereon (excluding the Bank Differential, if any, therefor) to the Purchase Date from the most recent Interest Payment Date therefor to which interest thereon has been paid or duly provided for.

“Purchaser” shall mean the initial purchaser of the Bonds named in Section 2.13 of this Ordinance.

“Rate Adjustment Date” for any Bond or portion thereof means each day on which such Bond or portion will, unless a Bank Bond, begin to bear interest at a new Daily Rate, Weekly Rate, Auction Rate, Commercial Paper Rate, Term Rate, or Fixed Rate determined in accordance with Section 2.2E(6), whether or not such rate is different from the interest rate previously in effect on the Bonds.

“Rate Determination Date” for any Bond or portion thereof means each date on which the Remarketing Agent is required to make a determination of the Daily Rate, Weekly Rate, initial Auction Rate, Commercial Paper Rate, Term Rate, or Fixed Rate to be borne by such Bond or portion pursuant to Section 2.2E(6).

“Rating Service” means each nationally recognized securities rating service which at the time has a credit rating assigned to the Bonds.

“Record Date” has the meaning stated in Section 2.2B.

“Reference Rate” for the Bonds or portions thereof in any Interest Period in an Auction Mode means (1) if such Interest Period is six months or shorter, then the product of LIBOR for such Interest Period and the “AA” Composite Commercial Paper Rate as of the Market Day preceding such Interest Period and (2) if such Interest Period is longer than six months, then the greater of LIBOR for such Interest Period and the yield on United States Treasury obligations having a maturity date that most closely approximates the duration of such Interest Period.

D-10 “Remarketing Agent” means the Person named as “Remarketing Agent” in Section 2.6F, until a substitute Remarketing Agent becomes such pursuant to such Section, and thereafter “Remarketing Agent” shall mean such successor.

“Remarketing Agreement” means the Remarketing Agreement, dated as of November 1, 2004, between the City and the initial Remarketing Agent, until the City shall have entered into a substitute agreement pursuant to Section 2.6F to provide for the remarketing of Bonds, and thereafter “Remarketing Agreement” shall mean such substitute agreement.

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., a corporation organized and existing under the laws of the State of New York, its successors and their assigns, and, if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “S&P” shall be deemed to refer to any other nationally recognized securities rating agency designated by the Board and acceptable to the Credit Enhancer.

“Securities Depository” means The Depository Trust Company or any successor Person appointed by ordinance of the City Council to act as Holder of the Bonds, directly or through a nominee, to maintain a system for recording and transferring beneficial interests in such Bonds and distributing payments thereon and notices in respect thereof.

“Securities Register” has the meaning stated in Section 2.4.

“Sell Order” has the meaning specified in Section 2.3A(1).

“Senior Lien Obligations” means (1) the outstanding and unpaid obligations of the City that are payable solely from and equally and ratably secured by a prior and first lien on and pledge of the Net Revenues of the Systems, identified as follows:

“City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, New Series 1992”, dated August 1, 1992 and originally issued in the total aggregate principal amount of $700,805,000;

“City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, New Series 1994- A”, dated February 1, 1994 and originally issued in the total aggregate principal amount of $684,700,000;

“City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, New Series 1994- C”, dated February 23, 1994 and originally issued in the total aggregate principal amount of $56,000,000;

“City of San Antonio, Texas Electric and Gas Systems Revenue Bonds, New Series 1995”, dated October 15, 1995 and originally issued in the total aggregate principal amount of $125,000,000;

“City of San Antonio, Texas Electric and Gas Systems Revenue and Refunding Bonds, New Series 1997”, dated May 1, 1997 and originally issued in the total aggregate principal amount of $661,170,000

“City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, New Series 1998A”, dated November 1, 1998 and originally issued in the total aggregate principal amount of $785,515,000;

“City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, Taxable New Series 1998B”, dated November 1, 1998 and originally issued in the total aggregate principal amount of $99,615,000;

“City of San Antonio, Texas Electric and Gas Systems Revenue Bonds, New Series 2000A”, dated November 15, 2000 and originally issued in the total aggregate principal amount of $170,770,000;

D-11 “City of San Antonio, Texas, Electric and Gas Systems Revenue Bonds, Taxable New Series 2000B”, dated November 15, 2000 and originally issued in the total aggregate principal amount of $50,425,000;

“City of San Antonio, Texas, Electric and Gas Systems Revenue Refunding Bonds, New Series 2001”, dated October 1, 2001 and originally issued in the total aggregate principal amount of $115,280,000;

“City of San Antonio, Texas, Electric and Gas Systems Revenue and Refunding Bonds, New Series 2002”, dated August 1, 2002 and originally issued in the total aggregate principal amount of $576,705,000;

“City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, New Series 2003 (Forward Delivery)”, dated July 1, 2003 and originally issued in the total aggregate principal amount of $350,490,000; and

“City of San Antonio, Texas Electric and Gas Systems Revenue Refunding Bonds, New Series 2003A”, dated July 1, 2003 and originally issued in the total aggregate principal amount of $93,935,000 and (2) obligations hereafter issued to refund any of the foregoing if issued in a manner so as to be payable from and equally and ratably secured by a first lien on and pledge of the Net Revenues of the Systems as determined by the City Council in accordance with any applicable law.

“Service Charge Rate” has the meaning stated in Section 2.2B.

“Special Payment Date” has the meaning stated in Section 2.4.

“Special Record Date” has the meaning stated in Section 2.4.

“Stated Maturity” has the meaning stated in Section 2.2A.

“Submission Deadline” means 1:00 p.m., New York, New York, time, on each Auction Date or such other time on an Auction Date as shall be specified from time to time by the Auction Agent pursuant to the Auction Agreement as the time by which Broker-Dealers are required to submit Orders to the Auction Agent.

“Submitted Bid” has the meaning specified in Section 2.3C(1).

“Submitted Hold Order” has the meaning specified in Section 2.3C(1).

“Submitted Sell Order” has the meaning specified in Section 2.3C(1).

“Substitute Commercial Paper Dealers” for the Bonds in an Auction Mode means such commercial paper dealers (other than the Commercial Paper Dealers) as the Market Agent may from time to time designate as such.

“Sufficient Clearing Bids” has the meaning stated in Section 2.3C(1).

“Systems” means the entire electric light and power plants and systems and gas distribution system and all property of every kind appurtenant to and used or acquired in connection with said electric light and power plants and systems and gas distribution system owned by the City, together with all property of every kind now and hereafter owned or acquired by the City as a part of or for use in the operation of the City’s electric light and power plants and systems and gas distribution system. Notwithstanding the foregoing, upon payment in full, or provision for such payment, of the Senior Lien Obligations issued before May 29, 1997, and the defeasance of the ordinances authorizing the issuance of such Senior Lien Obligations, the term Systems shall not mean or include facilities of any kind which are declared not to be a part of the Systems and which are acquired or constructed by or on behalf of the City with the proceeds from the issuance of Special Facilities Bonds, which are hereby defined as being special revenue obligations of the City which are not payable from Net Revenues but which are payable from and equally and ratably secured by other liens on and pledges of any revenues, sources or payments, not pledged to the payment of the Senior Lien Obligations

D-12 including, but not limited to, special contract revenues or payments received from any other legal entity in connection with such facilities.

“Term Mode” for any Bond or portion thereof means any period of time, determined in accordance with Sections 2.2B and 2.2C, during which interest on such Bond or portion (except when a Bank Bond) accrues at the Term Rate therefor.

“Term Rate” for any Bond or portion thereof has the meaning stated in Section 2.2B, to be specified in the Approval Certificate for the initial Interest Period and determined in accordance with Section 2.2E(5) for subsequent Interest Periods.

“Untendered Bonds” has the meaning stated in Section 2.6E.

“Weekly Mode” for any Bond means any period of time, determined in accordance with Section 2.2C, during which interest on such Bond (except when a Bank Bond) accrues at the Weekly Rate therefor.

“Weekly Rate” has the meaning stated in Section 2.2B, to be determined in accordance with Section 2.2E(2).

“Winning Bid Rate” at an Auction for the Bonds in an Auction Mode means the lowest rate specified in any Submitted Bid for such Bonds made at such Auction which, if selected by the Auction Agent as the Auction Rate for such Bonds, would cause the aggregate principal amount of Outstanding Bonds that are the subject of Submitted Bids specifying a rate not greater than such rate to be not less than the aggregate principal amount of Available Bonds.

Section 4.3. Pledge of Net Revenues.

A. Pledge. Payment of the principal of and interest on (but not the Purchase Price of) the Bonds and the obligations of the City under the Liquidity Facility are and shall be secured by and payable solely from, and the City hereby grants a junior lien on and pledge of, the Net Revenues, subject and subordinate to the liens on and pledges of Net Revenues heretofore or hereafter made to secure payment of the Senior Lien Obligations and the Additional Senior Lien Obligations (and equally and ratably with the lien on and pledge of Net Revenues heretofore or hereafter made to secure payment of the Junior Lien Obligations and Additional Junior Lien Obligations). Neither the Bonds nor the Liquidity Facility is secured by or payable from a mortgage or deed of trust on any properties, whether real, personal, or mixed, constituting the Systems. The Bonds are being issued as junior lien obligations.

B. Perfection. Chapter 1208, Texas Government Code, applies to the issuance of the Bonds and the pledge of Net Revenues granted by the City under Subsection A of this Section, and such pledge is therefore valid, effective, and perfected. If Texas law is amended at anytime while the Bonds are outstanding and unpaid such that the pledge of the Net Revenues granted by the City is to be subject to the filing requirements of Chapter 9, Texas Business & Commerce Code, then in order to preserve to the registered owners of the Bonds the perfection of the security interest in this pledge, the Board agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9, Texas Business & Commerce Code, and enable a filing to perfect the security interest in this pledge to occur.

C. No Tax Support. The Bonds are special obligations of the City payable solely from the Net Revenues, and the holders thereof shall never have the right to demand payment out of funds raised or to be raised by taxation.

Section 4.5. Satisfaction of Obligation of City.

When no Bond remains Outstanding and the obligations of the City under the Liquidity Facility have been paid in full or otherwise discharged, then the lien on and pledge of Net Revenues under this Ordinance and all covenants, agreements, and other obligations of the City to the Holders shall thereupon cease, terminate, and be discharged and satisfied.

To provide for the payment of the principal of, premium, if any, and interest on any Bond, the City may irrevocably deposit in trust with the Paying Agent/Registrar, or an authorized escrow agent, (a) money sufficient to pay

D-13 in full such principal, premium, if any, and interest at Stated Maturity or to the redemption date therefor and/or (b) Government Securities certified by an independent accounting firm, or such other persons as permitted by the laws of the State of Texas, to mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money, together with any money deposited therewith, if any, to pay when due the principal of, premium, if any, and interest on such Bond on and prior to the Stated Maturity thereof or (if notice of redemption has been duly given or waived or if irrevocable arrangements therefor acceptable to the Paying Agent/Registrar have been made) the redemption date thereof. If interest to become due on such Bond on any such date shall accrue at a rate not determined at the time of such deposit, the City shall provide for such interest as if accrued at the maximum possible rate. The City covenants that no deposit of money or Government Securities will be made under this Section and no use made of any such deposit which would cause the Bonds to be treated as arbitrage bonds within the meaning of section 148 of the Code.

Any money so deposited with the Paying Agent/Registrar, and all income from Government Securities held in trust by the Paying Agent/Registrar, or an authorized escrow agent, pursuant to this Section which is not required for the payment of the Bonds, or any principal amount(s) thereof, or interest thereon with respect to which such money has been so deposited shall be remitted to the Board or deposited as directed by the Board. Furthermore, any money held by the Paying Agent/Registrar for the payment of the principal of, premium, if any, or interest on the Bonds and remaining unclaimed for a period of four (4) years after the Stated Maturity, or applicable redemption date, of the Bonds such money was deposited and is held in trust to pay shall upon the request of the Board be remitted to the Board against a written receipt therefor, subject to the unclaimed property laws of the State of Texas.

Notwithstanding any other provision of this Ordinance to the contrary, it is hereby provided that any determination not to redeem defeased Bonds that is made in conjunction with the payment arrangements specified in Clause (a) or (b) above shall be revocable, provided that the City (1) in the proceedings providing for such defeasance, expressly reserves the right to call the defeased Bonds for redemption; (2) gives notice of the reservation of that right to the owners of the defeased Bonds immediately following the defeasance; (3) directs that notice of the reservation be included in any redemption notices that it authorizes; and (4) at the time of the redemption, satisfies the conditions of Clause (a) or (b) above with respect to such defeased Bonds as though it was being defeased at the time of the exercise of the option to redeem the defeased Bonds, after taking the redemption into account in determining the sufficiency of the provisions made for the payment of the defeased Bonds.

Section 5.1. General Account.

The City, acting through the Board, hereby covenants with respect to the holders of the Bonds that all revenues of every nature received through the operation of the Systems shall be deposited as received in the “City of San Antonio Electric and Gas Systems General Account” (the “General Account”), which shall be kept separate and apart from all other funds of the City. Revenues received for the General Account shall be deposited from time to time as received in such Depository as may be selected by the Board in accordance with applicable laws relating to the selection of political subdivision depositories. All gross revenues deposited into the General Account shall be pledged and appropriated to the extent required for the following uses and in the order of priority shown:

 FIRST: to the payment of reasonable and proper Maintenance and Operating Expenses of the Systems upon approval by the Board of Trustees;

 SECOND: to the payment of the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued by the City, including the establishment and maintenance of the reserve therefor;

 THIRD: to the payment of the Junior Lien Obligations, the Bonds, the Liquidity Facility, and any Additional Junior Lien Obligations hereafter issued by the City or any other Prior Lien Bonds (as defined in the ordinance authorizing the Commercial Paper Obligations), including the establishment and maintenance of a reserve therefor;

 FOURTH: to the payment and security of the Notes and the Agreement (each as defined in the ordinance authorizing the Commercial Paper Obligations);

 FIFTH: to the payment and security of any Inferior Lien Obligations, including obligations hereinafter issued which are inferior in lien to the Senior Lien Obligations, any Additional

D-14 Senior Lien Obligations, the Junior Lien Obligations, the Bonds, the Liquidity Facility, any Additional Junior Lien Obligations, and the Notes;

 SIXTH: to the payment of an annual amount equal to six percent (6%) of the gross revenues of the Systems to be deposited in the Repair and Replacement Account (created in the ordinances authorizing the Senior Lien Obligations) provided in Section 5.4;

 SEVENTH: to the payment of the annual amount due the General Fund of the City, as provided in Section 5.3; and

 EIGHTH: any remaining Net Revenues of the Systems in the General Account, to the Repair and Replacement Account to the extent provided in Section 5.4.

Any Net Revenues remaining in the General Account after satisfying the foregoing payments, or making adequate and sufficient provision for the payment thereof, may be appropriated and used for any other Board purpose now or hereafter permitted by law and the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations, subject to Section 5.4.

Section 5.2. Bond Fund; Excess Bond Proceeds.

For purposes of providing funds to pay the principal of and interest on, and other amounts payable under, the Bonds, the Liquidity Facility, any Credit Facility, the Remarketing Agreement, and the Paying Agent/Registrar Agreement, as the same become due and payable, and for so long as any Bonds remain Outstanding or the City remains obligated under any other such agreement, the City agrees to maintain, at the Depository, a separate and special Fund or account to be created and known as the “City of San Antonio, Texas, Electric and Gas Systems Junior Lien Revenue Bonds, Series 2004 Interest and Sinking Fund” (herein referred to as the “Bond Fund”). The City covenants that there shall be deposited into the Bond Fund prior to each payment date from the available Net Revenues an amount equal to one hundred per cent (100%) of the amount required to fully make such payments when due and payable, such deposits to be made in monthly installments that are substantially equal whenever Bonds are in a Term Mode or Fixed Mode. If the Net Revenues in any month are insufficient to make the required payments into the Bond Fund, then the amount of any deficiency in such payment shall be added to the amount otherwise required to be paid into the Bond Fund in the next month.

Any proceeds of the Bonds, and investment income thereon, not expended for authorized purposes shall be deposited into the Bond Fund and shall be taken into consideration and reduce the amount of monthly deposits required to be deposited into the Bond Fund from the Net Revenues of the Systems.

Section 5.3. Payments to City General Fund.

In accordance with the provisions of the ordinances authorizing the issuance of the Senior Lien Obligations and this Ordinance, and after the payments required by Clauses First through Fifth of Section 5.1 and to the Repair and Replacement Account (for purposes of accumulating therein an amount equal to six percent (6%) of the annual gross revenues of the Systems) have been made in full in accordance with the provisions of this Ordinance, there shall be paid over or credited to the General Fund of the City (for general purposes of the City), to the extent Net Revenues of the Systems are available in the General Account and in monthly installments, an amount in cash not to exceed 14% of the gross revenues of the Systems for the month next preceding the month in which the monthly deposit is made, less the value of gas and electric services of the Systems used by the City for municipal purposes and the amount expended for additions to the street lighting system for the month for which such payment is being made. The maximum amount in cash to be transferred or credited to the General Fund of the City from the Net Revenues of the Systems during any Fiscal Year shall not exceed 14% of the gross revenues of the Systems less the value of gas and electric services of the Systems used by the City for municipal purposes and the amounts expended during the Fiscal Year for additions to the street lighting system. The percentage of gross revenues of the Systems to be paid over or credited to the General Fund of the City each Fiscal Year shall be determined (within the 14% limitation) by the governing body of the City.

Section 5.4. Repair and Replacement Account.

The City reaffirms the prior creation and establishment of a special fund or account to be known as the “City of San Antonio Electric and Gas Systems Repair and Replacement Account” (the “Repair and Replacement Account”) at such Depository as may be designated by the Board of Trustees. Money on deposit in the Repair and Replacement

D-15 Account shall be used for the following purposes: providing extensions, additions, and improvements to the Systems; meeting contingencies of any nature in connection with the operations, maintenance, improvement, replacement, or restoration of properties of the Systems; and paying bonds or other obligations for which other funds are not available, or for any or all of such purposes, as, from time to time, may be determined by the Board of Trustees.

From the Net Revenues remaining in the General Account after payment and provisions for payments and additions to the Bond Fund in accordance with the provisions of Section 5.2, there shall be paid into the Repair and Replacement Account an annual sum equal to six percent (6%) of the gross revenues of the Systems for the then current Fiscal Year. This annual payment to the Repair and Replacement Account shall be accumulated each Fiscal Year by monthly installments, such monthly installments to be based on each month’s gross revenues to the extent funds in the General Account are available each month; provided, however, should the total annual payment to the Repair and Replacement Account in any Fiscal Year exceed six percent (6%) of the gross revenues of the Systems, as shown by the Systems’ audited annual financial statement, proper year-end adjustments shall be made (on or before March l after the close of each Fiscal Year) by causing any excess amount deposited therein to be transferred to the General Account.

No deposit in excess of six percent (6%) of the annual gross revenues of the Systems shall be made to the Repair and Replacement Account (as provided in the preceding paragraph) unless and until complete and full payments, or provisions for such payments, shall have been paid over or credited to the General Fund of the City in accordance with Section 5.3. After complete and full payments, or provisions for such payments, shall have been paid over or credited to the General Fund of the City to the full extent required in Section 5.3, additional deposits may be made to the Repair and Replacement Account; and at the close of each Fiscal Year, all Net Revenues of the Systems remaining in the General Account after full and complete payment to the General Fund of the City has been made (except such amounts as may be required to meet unpaid accounts and obligations which have accrued or are payable during the year to insure continued operation of the Systems), shall be deposited in the Repair and Replacement Account.

Section 6.1. Application of the Covenants and Agreements of the Senior Lien Obligations.

It is the intention of the City Council and accordingly hereby recognized and stipulated that the provisions, agreements, and covenants contained herein bearing upon the management and operations of the Systems, and the administration and application of gross revenues derived from the operation thereof, shall to the extent possible be harmonized with like provisions, agreements, and covenants contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations, and to the extent of any irreconcilable conflict between the provisions contained herein and in the ordinance authorizing the issuance of the currently outstanding Senior Lien Obligations, the provisions, agreements and covenants contained therein shall prevail to the extent of such conflict and be applicable to this Ordinance, especially the priority of rights and benefits conferred thereby to the holders of the currently outstanding Senior Lien Obligations. It is expressly recognized that, prior to the issuance of any Additional Senior Lien Obligations or Additional Junior Lien Obligations, the City must comply with each of the conditions precedent contained in this Ordinance and the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations, as appropriate.

Section 6.2. Issuance of Additional Senior Lien Obligations, Additional Junior Lien Obligations, and Inferior Lien Obligations

The City hereby expressly reserves the right to hereafter issue bonds, notes, warrants, certificates of obligation, or similar obligations payable wholly or in part from and secured by a pledge of and lien on the Net Revenues of the Systems with the following priorities, without limitation as to principal amount, but subject to any terms, conditions, or restrictions applicable thereto under existing ordinances, laws, or otherwise:

A. Senior Lien: Additional Senior Lien Obligations payable from and equally and ratably secured by a first and prior lien on and pledge of the Net Revenues of the Systems upon (1) satisfying each of the conditions precedent contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations or, in the event no Senior Lien Obligations are outstanding, the conditions precedent contained in the most recently adopted ordinance authorizing Senior Lien Obligations and (2) execution by a Designated Financial Officer of the certificates described in Subsections B(1) and B(2) of this Section, taking into account the Senior Lien Obligations then proposed to be issued;

B. Junior Lien: Additional Junior Lien Obligations payable from and equally and ratably secured by a junior lien on and pledge of the Net Revenues that is subordinate and inferior to the liens and pledges made to secure payment of the currently outstanding Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued, upon satisfying each of the conditions precedent contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations and upon satisfying each of the following conditions precedent:

D-16 (1) No Default Certificate: a Designated Financial Officer (or other official of the City having primary responsibility for the fiscal affairs of the City) shall have executed a certificate stating that (a) except for a refunding to cure a default, or the deposit of a portion of the proceeds of any Additional Junior Lien Obligations to satisfy the City’s obligations under this Ordinance, the City is not then in default as to any covenant, obligation, or agreement contained in any ordinance or other proceedings relating to any obligations of the City payable from and secured by a lien on and pledge of the Net Revenues of the Systems and (b) all payments into all special funds or accounts created and established for the payment and security of all outstanding obligations payable from and secured by a lien on and pledge of the Net Revenues of the Systems have been duly made and that the amounts on deposit in such special funds or accounts are the amounts then required to be deposited therein;

(2) Coverage Certificate: a Designated Financial Officer shall have executed a certificate to the effect that, according to the books and records of the Systems, the Net Revenues of the Systems for the preceding Fiscal Year or for any 12 consecutive months out of the 18 months immediately preceding the month the ordinance authorizing the Additional Junior Lien Obligations is adopted (determined without regard to revenue received by the City under any interest rate hedge agreement entered into in connection with Senior Lien Obligations, the Bonds, Additional Senior Lien Obligations, or Additional Junior Lien Obligations) are at least equal to 100% of the average annual Debt Service Requirements for all Senior Lien Obligations, Junior Lien Obligations, Bonds, Additional Senior Lien Obligations, and Additional Junior Lien Obligations in any future Fiscal Year while the Additional Junior Lien Obligations then proposed to be issued are to be outstanding, after giving effect to such Additional Junior Lien Obligations (and, in making a determination of the Net Revenues, such Designated Financial Officer may take into consideration a change in the rates and charges for services and facilities afforded by the Systems that became effective at least 60 days prior to the last day of the period for which Net Revenues are to be determined and, for purposes of satisfying the above Net Revenues test, make a pro forma determination of the Net Revenues for the period of time covered by the certification based on such change in rates and charges being in effect for the entire period covered by such Designated Financial Officer’s certificate); and

(3) Debt Service Deposits: the ordinance authorizing the issuance of the Additional Junior Lien Obligations provides for monthly deposits to be made to a debt service fund for such obligations in amounts sufficient to pay the Additional Junior Lien Obligations when due; and

D. Inferior Lien: Commercial Paper Obligations and Inferior Lien Obligations payable from and secured by a lien on and pledge of the Net Revenues of the Systems that is inferior and subordinate to the liens and pledges made to secure payment of the Senior Lien Obligations, Additional Senior Lien Obligations, the Bonds, and Additional Junior Lien Obligations, upon satisfying each of the conditions precedent contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations, this Ordinance, and the ordinance authorizing the issuance of the Commercial Paper Obligations.

Section 6.5. Special Covenants and Representations.

The City hereby further warrants and covenants that:

A. Board Agreement. The City has secured from the Board of Trustees a resolution acknowledging its duties, responsibilities, and obligations under this Ordinance and agreeing to fully comply with all its terms and provisions, including the administration and operation of the Systems and the disposition of revenues of the Systems.

B. Lawful Pledge. It has the lawful power to pledge the Net Revenues supporting the Bonds and has lawfully exercised said power under the laws of the State of Texas, including said power existing under the Acts, and the Additional Junior Lien Obligations, when issued, shall be equally and ratably secured under said pledge of income in such manner that one bond shall have no preference over any other bond of said issues.

C. No Inconsistent Liens. Other than for the payment of the Senior Lien Obligations, the Junior Lien Obligations, the Bonds, and the Commercial Paper Obligations, the rents, revenues and income of the Systems have not in any manner been pledged to the payment of any debt or obligation of the City or of the Systems, except that certain D-17 reimbursement agreements, indemnity agreements, credit facility agreements, and other financial or contractual arrangements which have been or may be entered into by the City grant a subordinate and inferior lien on and pledge of the Net Revenues of the Systems to secure the payment obligations of the City or the Board under these agreements, which lien is subordinate and inferior to the lien on and pledge thereof securing the payment of any Maintenance and Operating Expenses, the debt service requirements on the Senior Lien Obligations, the Junior Lien Obligations, the Bonds, and the Commercial Paper Obligations, and any other provision of the ordinances authorizing the issuance of these obligations.

D. Non-Disposition. So long as any of the Bonds or any interest thereon remain Outstanding, the City will not sell or encumber the Systems or any substantial part thereof; provided that this shall not be construed to prohibit the sale of such machinery or other properties or equipment which has become obsolete or otherwise unsuited to the efficient operation of the Systems.

E. No Free Service. No free service of the Systems shall be allowed, and, should the City or any of its agents or instrumentalities make use of the services or facilities of the Systems, payments for services rendered by the Systems should either be made by the City or amounts equal in value to the services rendered by the Systems shall be deducted from the annual payment due the General Fund of the City from the Net Revenues of the Systems as provided in Section 5.3.

F. Non-Competition. To the extent it legally may, the City further covenants and agrees that, so long as any Bonds or any interest thereon are Outstanding, no franchise shall be granted for the installation or operation of any competing electric or gas system other than that owned by the City, and the operation of any such systems by anyone other than the City is hereby prohibited.

Section 6.6. Rates and Charges.

While any of the Bonds authorized hereby are Outstanding, the City shall establish and maintain rates and charges for facilities and services afforded by the Systems that are reasonably expected, on the basis of available information and experience and with due allowance for contingencies, to produce income and revenues in each Fiscal Year sufficient:

Prior Lien Expenses: to pay all Maintenance and Operating Expenses, depreciation, replacement and betterment expenses, and other costs as may be required by Chapter 1502, as amended, Texas Government Code;

A. Senior Lien Expenses: to produce Net Revenues, together with any other lawfully available funds, sufficient to satisfy the rate covenant contained in the ordinances authorizing the issuance of the currently outstanding Senior Lien Obligations and to pay the interest on and principal of all Senior Lien Obligations and any Additional Senior Lien Obligations hereafter issued, as and when the same shall become due, and for the establishment and maintenance of the funds and accounts created for the payment and security of the Senior Lien Obligations;

B. Junior Lien Expenses: to produce Net Revenues, together with any other lawfully available funds, to pay the interest on and principal of all Junior Lien Obligations, the Bonds, the Liquidity Facility, and any Additional Junior Lien Obligations hereafter issued, as and when the same shall become due, and for the establishment and maintenance of the funds and accounts created for the payment and security of the Bonds;

C. Commercial Paper Expenses: to the extent the same are reasonably anticipated to be paid with Available Revenues (as defined in the ordinance authorizing the Commercial Paper Obligations), the interest on and principal of all Notes (as defined in said ordinance) and the Credit Agreement (as defined in said ordinance); and

D. Inferior Lien Expenses: to pay any Inferior Lien Obligations or any other legal debt or obligation of the Systems as and when the same shall become due.

Section 6.10. Management of Systems.

In accordance with the provisions of the ordinances authorizing the currently outstanding Senior Lien Obligations and this Ordinance, the City hereby agrees, covenants, and reaffirms that during such time as any Bonds issued hereunder are Outstanding and unpaid, the complete management and control of the Systems, pursuant to the authority contained in Section 1502.070, as amended, Texas Government Code, shall be vested in a Board of Trustees consisting of five citizens (one of whom shall be the Mayor of the City) of the United States of America permanently residing in Bexar County, Texas, to be known as the “City Public Service Board of San Antonio, Texas”. The Mayor of

D-18 the City shall be a voting member of the Board, shall represent the City Council thereon, and shall be charged with the duty and responsibility of keeping the City Council fully advised and informed at all times of any actions, deliberations and decisions of the Board and its conduct of the management of the Systems.

All vacancies in membership on the Board (excluding the Mayor of the City), whether occasioned by failure or refusal of any person previously named to accept appointment or by expiration of term of office or otherwise, shall be filled in the following manner: a nominee to fill such vacancy shall be elected by the majority vote of the remaining members of the Board of Trustees, such majority vote to include the vote of the Mayor. The name of such nominee shall then be submitted by the Mayor to the vote of the City Council, which by a majority vote of the members thereof then in office shall, as evidenced by ordinance or resolution, either confirm or reject such nominee; provided, however, if the City Council fails to act upon such nominee, such failure to do so shall be considered as a rejection of such nominee and another nominee shall be selected by the Board. If a vacancy occurs and the remaining members of the Board (including the Mayor) fail to elect a nominee to fill such vacancy within sixty (60) days after the vacancy occurs (or fail to select another nominee within sixty (60) days after rejection of a nominee by the City Council), the City Council, by a majority vote of the members thereof then in office, shall elect a person to fill such vacancy and shall appoint such Trustee by resolution or ordinance. In the event the City rejects or fails to confirm three (3) consecutive nominees of the Board to fill a vacancy on the Board, the City Council shall, within thirty (30) days after the third rejection, appoint a temporary Trustee to fill such vacancy pending the appointment of a permanent Trustee to fill such vacancy. The appointment of a temporary Trustee by the City Council shall constitute the nomination of such appointee as the permanent Trustee to fill such vacancy. Unless the remaining members of the Board, by a majority vote, reject the nominee selected by the City Council within thirty (30) days after his appointment as a temporary Trustee, the appointment shall become final and the temporary Trustee shall automatically become the permanent Trustee to fill such vacancy. In such vote, the vote of the Mayor shall automatically be cast as a vote in favor of the confirmation of such Trustee, whether cast by the Mayor or not.

If the nominee of the City Council is rejected by a majority vote of the remaining Trustees, the remaining Trustees shall within thirty (30) days after such rejection elect another nominee to fill such vacancy. Such nominee shall be considered by the City Council and if approved shall become the permanent Trustee. If such nominee is rejected by a majority vote of the members of the City Council then in office, or in the event the City Council fails to act upon such nomination within thirty (30) days after the nomination is presented to the City Council, the temporary Trustee theretofore appointed by the City Council shall automatically become the permanent Trustee to fill such vacancy. The term of office of each member appointed to the Board shall be five (5) years. A person who has served as an appointed member of the Board for a single five-year term shall be eligible for reappointment for one additional five-year term and one only. A member who is appointed to the Board to serve out an unexpired portion of a retired member’s term shall not be considered to have served a “term” unless the unexpired portion of the term so served is three (3) years or more. Permanent removal of residence from Bexar County by any appointed member of the Board shall vacate his office as a member of the Board, or any member (other than the Mayor of the City) who shall be continuously absent from all meetings held by the Board for a period of four (4) consecutive months shall, unless he shall have been granted leave of absence by the unanimous vote of the remaining members of the Board, be considered to have vacated his office as a member of the Board. Any member of the Board, other than the Mayor of the City, may, by unanimous vote of the remaining members of the Board, be removed from office, but only for adequate cause.

Notwithstanding any of the foregoing provisions as contained in this Section or in any other section of this Ordinance pertaining to the appointment or selection of Trustees to the Board, the City Council reserves unto itself the absolute right at any time upon passage of an ordinance approved by a majority vote of its members to change the method of selection of and appointment to the Board of Trustees to direct selection by the City Council, with such change of method to direct selection being at the sole option of the City Council without approval of any persons, party, holder of Bonds, or the Board of Trustees.

Except as otherwise specifically provided in this Ordinance, the Board of Trustees shall have absolute and complete authority and power with reference to the control, management, and operation of the Systems and the expenditure and application of the revenues of the Systems subject to the provisions contained in this Ordinance, all of which shall be binding upon and shall govern the Board of Trustees. In connection with the management and operation of the Systems and the expenditure and application of the revenues therefrom, the Board of Trustees shall be vested with all of the powers of the City with respect thereto, including all powers necessary or appropriate for the performance of all of the covenants, undertakings, and agreements of the City contained in this Ordinance, and shall have full power and authority to make rules and regulations governing the furnishing of electric and gas service to customers and for the payment of the same, and for the discontinuance of such services upon failure of customers to pay therefor, and, to the extent authorized by law, shall have full authority with reference to making of extensions, improvements, and additions to the Systems and the acquiring by purchase or condemnation of properties of every kind in connection therewith.

D-19 The Board of Trustees, in exercising the management powers granted herein, will ensure that policies adopted affecting research, development, and corporate planning will be consistent with City Council policy, and policies adopted by the Board of Trustees pertaining to such matters will be subject to City Council review.

The Board of Trustees shall elect one of its members as Chairman and one as Vice Chairman of the Board and shall appoint a Secretary and a Treasurer, or a Secretary-Treasurer, who may, but need not be, a member or members of the Board. If a member of the Board of Trustees is not appointed as Secretary or Treasurer, or Secretary-Treasurer, then an employee or employees of the Board whose duties in the operation of the Systems require performance of similar duties may be appointed as Secretary or Treasurer or Secretary-Treasurer. The Board of Trustees may follow and adopt such rules for the orderly handling of its affairs as it may see fit and may manage and conduct the affairs of the Systems with the same freedom and in the same manner ordinarily employed by the board of directors of private corporations operating properties of a similar nature. No member of the Board of Trustees, however, shall ever vote by proxy in the exercise of his duties as a Trustee.

The Board of Trustees shall appoint and employ all officers, employees, and professional consultants which it may deem desirable, including without limitation, a General Manager and CEO of the Systems, attorneys, engineers, architects, and other advisors. No officer or employee of the Board of Trustees may be employed who shall be related within the second degree of consanguinity or affinity to any member of the Board of Trustees.

The Board of Trustees shall obtain and keep continually in force an employees’ fidelity and indemnity bond of the so-called “blanket” type, written by a solvent and recognized indemnity company authorized to do business in the State of Texas and covering losses to the amount of not less than One Hundred Thousand Dollars ($100,000).

The members of the Board of Trustees, other than the Mayor of the City, shall receive annual compensation in the minimum amount of Two Thousand Dollars ($2,000.00), except that the Chairman of the Board shall receive annual compensation in the minimum amount of Two Thousand Five Hundred Dollars ($2,500.00). Such compensation may be increased from time to time by the majority vote of the City Council then in office.

The members of the Board of Trustees and administrative officers shall not be personally liable, either individually or collectively, for any act or omission not willfully fraudulent or in bad faith.

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D-20    

                

                   

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  Legal Opinion of Fulbright & Jaworski L.L.P. in connection with the remarketing to a two year Term Rate relating to “CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, SERIES 2004”

[FORM OF 2010 REMARKETING OPINION OF BOND COUNSEL]

FINAL

IN REGARD to the remarketing of the City of San Antonio, Texas Electric and Gas Systems Junior Lien Revenue Bonds, Series 2004 (the Bonds), dated as of November 18, 2004, in the aggregate outstanding principal amount of $147,615,000 we have reviewed the legality and validity of the issuance thereof by the City of San Antonio, Texas (the Issuer). The Bonds are remarketed in fully registered form only and are stated to mature as provided in the Ordinance of the City Council of the Issuer (the Council) authorizing the issuance of the Bonds (the Ordinance), unless redeemed prior to stated maturity in accordance with the terms stated in the Ordinance. Interest on the Bonds accrues from the dates, at the rates, and in the manner, and is payable on the dates as provided in the Ordinance.

WE HAVE SERVED AS BOND COUNSEL for the Issuer solely to pass upon the legality and validity of certain matters as required under the Ordinance in connection with the conversion of the interest rate mode relating to and the remarketing of the Bonds in accordance with and pursuant to the terms of the Ordinance and applicable law and for no other purpose. We have not been requested to investigate or verify, and have not independently investigated or verified, any records, data, or other material relating to the financial condition or capabilities of the Issuer or the Issuer’s electric and gas systems and have not assumed any responsibility with respect to the financial condition or capabilities of the Issuer or the disclosure thereof in connection with the remarketing of the Bonds. We express no opinion and make no comment with respect to the sufficiency of the security for or the marketability of the Bonds. Our role in connection with the Issuer’s Remarketing Memorandum prepared for use in connection with the remarketing of the Bonds has been limited as described therein.

WE HAVE EXAMINED the applicable and pertinent laws of the State of Texas and the United States of America. In rendering the opinions herein we rely upon (1) original or certified copies of the proceedings of the City Council of the Issuer in connection with the issuance and remarketing of the Bonds, including the Ordinance; a resolution concerning the remarketing of the Bonds adopted by the Board of Trustees (the Board) of the City Public Service Board of San Antonio, Texas on September 27, 2010; and an ordinance concerning the remarketing of the Bonds adopted by the Council on October 21, 2010; (2) customary certifications and opinions of officials of the Issuer and the Board; (3) certificates executed by officers of the Issuer and the Board relating to the expected use and investment of proceeds of the Bonds and certain other funds of the Issuer and the Board, and to certain other facts solely within the knowledge and control of the Issuer and the Board; and such other documentation, including an examination of the Bonds executed and delivered initially by the Issuer, and such matters of law as we deem relevant to the matters discussed below. In such examination, we have assumed the authenticity of all documents submitted to us as originals, the conformity to original copies of all documents submitted to us as certified copies, and the accuracy of the statements and information contained in such certificates. We express no opinion concerning any effect on the following opinions which may result from changes in law effected after the date hereof.

BASED ON OUR EXAMINATION, IT IS OUR OPINION that, assuming continuing compliance after the date hereof by the Issuer and the Board with the provisions of the Ordinance, the conversion of the Bonds to a two year Term Rate period from the existing three year Term Rate period and subsequent

90230765.2 E-3 Legal Opinion of Fulbright & Jaworski L.L.P. in connection with the remarketing to a two year Term Rate relating to “CITY OF SAN ANTONIO, TEXAS ELECTRIC AND GAS SYSTEMS JUNIOR LIEN REVENUE BONDS, SERIES 2004”

remarketing thereof, all as provided for in and accordance with the Ordinance, will not have an adverse effect on the exclusion of interest on the Bonds from the gross income for federal income tax purposes under existing law, subject to the matters described herein, and is authorized by applicable Texas law.

The Ordinance provides that prior to taking certain actions the Issuer must have received an opinion of bond counsel to the effect that such action will not adversely affect the exclusion from gross income for federal income tax purposes of the interest on the Bonds (an “Opinion of Bond Counsel”). We have not been asked to undertake nor have we undertaken any review or investigation of and, accordingly, express no opinion currently, except as stated above, on the exclusion from gross income for federal income tax purposes of interest on the Bonds. Co-Bond Counsel’s opinion (the “Original Opinion”) delivered on November 18, 2004 in connection with the initial delivery of the Bonds assumed continued compliance with the covenants of the Ordinance relating to the exclusion from gross income of interest on the Bonds for federal income tax purposes and relied upon representations by the Issuer and the Board with respect to matters solely within their knowledge, which Co-Bond Counsel had not independently verified. If the Issuer and the Board failed or fails to comply with the covenants of the Ordinance, or if the representations should be determined to be inaccurate or incomplete, interest on the Bonds could become taxable from the date of initial delivery of the Bonds, regardless of the date on which an event causing taxability occurs.

WE CALL YOUR ATTENTION TO THE FACT THAT interest on all tax-exempt obligations, such as the Bonds, owned by a corporation will be included in such corporation’s adjusted current earnings for purposes of calculating the alternative minimum taxable income of such corporation, other than an S corporation, a mutual fund, a financial asset securitization investment trust, a real estate mortgage investment conduit, or a real estate investment trust. A corporation’s alternative minimum taxable income is the basis on which the alternative minimum tax imposed by section 55 of the Code will be computed.

WE EXPRESS NO OTHER OPINION with respect to any other federal, state, or local tax consequences under present law or any proposed legislation resulting from the receipt or accrual of interest on, or the acquisition or disposition of, the Bonds. Ownership of tax-exempt obligations such as the Bonds may result in collateral federal tax consequences to, among others, financial institutions, life insurance companies, property and casualty insurance companies, certain foreign corporations doing business in the United States, S corporations with subchapter C earnings and profits, owners of an interest in a financial asset securitization investment trust, individual recipients of Social Security or Railroad Retirement Benefits, individuals otherwise qualifying for the earned income credit, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry, or who have paid or incurred certain expenses allocable to, tax-exempt obligations.

OUR OPINIONS ARE BASED on existing law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service; rather, such opinions represent our legal judgment based upon our review of existing law that we deem relevant to such opinions and in reliance upon the representations and covenants referenced above.

90230765.2 E-4 APPENDIX F 

  CPS ENERGY            

THE LIQUIDITY BANK                               BANK DISCLOSURE STATEMENT

The BNP Paribas Group (the “Group”) (of which BNP Paribas, a French corporation (société anonyme), is the parent company) is a European leader in global banking and financial services and is one of the 6 strongest banks in the world according to Standard & Poor's. The group is present in 85 countries, with more than 205,000 employees, including 131,000 in Europe and 16,000 in the United States. The group holds key positions in three major segments: Corporate and Investment Banking, Investment Solutions and Retail Banking. Present throughout Europe in all of its business lines, the bank's two domestic markets in retail banking are France and Italy. BNP Paribas also has a significant and growing presence in the United States and strong positions in Asia and the emerging markets.

At 31 December 2009, the Group had consolidated assets of €2,057.7 billion (compared to €2,075.6 billion at 31 December 2008), consolidated loans and receivables due from customers of €678.8 billion (compared to €494.4 billion at 31 December 2008), consolidated items due to customers of €604.9 billion (compared to €413.9 billion at 31 December 2008) and shareholders’ equity (Group share including income for 2009) of €69.5 billion (compared to €53.2 billion at 31 December 2008). Pre-tax net income for the year ended 31 December 2009 was €9.0 billion (compared to €3.9 billion for the year ended 31 December 2008). Net income, Group share, for the year ended 31 December 2009 was €5.8 billion (compared to €3.0 billion for the year ended 31 December 2008). For up-to-date financial information, including quarterly results since the last fiscal year end, please refer to http://invest.bnpparibas.com.

As of 20 January 2010, the Group had long-term senior debt ratings of Aa2 (stable outlook) from Moody’s, AA (negative outlook) from S&P and AA (negative outlook) from Fitch.

The Group has three divisions: Retail Banking, Investment Solutions and Corporate and Investment Banking. Operationally, the Retail Banking division is itself comprised of three core businesses: French Retail Banking, Italian Retail Banking (BNL bc) and International Retail Banking and Financial Services. The Group has additional activities, including those of its listed real estate subsidiary, Klépierre, which are conducted outside of its core businesses.

The information concerning BNP Paribas and the Group contained herein is furnished solely to provide limited introductory information regarding BNP Paribas and the Group and does not purport to be comprehensive.

The delivery of the information contained in this section shall not create any implication that there has been no change in the affairs of BNP Paribas or the Group since the date hereof, or that the information contained or referred to in this section is correct as of any time subsequent to its date.

F-1 MUNICIPALLY OWNED ELECTRIC & GAS UTILITY SAN ANTONIO, TEXAS 2010